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Loblaw is doing a good job of competing with U.S. retail giants like Wal-Mart, which are aggressively expanding in the grocery market. In addition to improving its efficiency and profiting from its Joe Fresh clothing line, it has bought Shoppers DrugMart, which nicely complements its main business. And now it has seen its competition diminish with Target’s decision to close its Canadian stores.
LOBLAW COMPANIES LTD. (Toronto symbol L; www.loblaw.ca) is Canada’s largest food retailer, with about 1,050 stores.
The company is benefiting from sales of other products beyond food. For example, in 2006 it launched its popular Joe Fresh line of clothing, shoes and accessories.
Loblaw sells these goods in over 330 of its supermarkets and through 17 stand-alone stores in the U.S. and Canada. It plans to open 140 more Joe Fresh stores outside of North America in the next four years.
As well, in March 2014, Loblaw paid $12.3 billion in cash and stock for the 1,250- store Shoppers Drug Mart chain.
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Stocks to buy: Loblaw will cut up to $300 million in costs thanks to Shoppers merger
In the quarter ended October 4, 2014, the company’s overall sales jumped 35.9%, to $13.6 billion from $10.0 billion a year earlier. Without Shoppers, sales gained 2.0%.
Higher meat and produce prices increased same-store sales by 2.6% at its supermarkets. At Shoppers, same-store sales gained 1.6%, excluding prescription drugs.
Without unusual items, earnings jumped 81.0%, to $371 million from $205 million. Per-share earnings rose 23.3%, to $0.90 from $0.73, on more shares outstanding.
So far, Loblaw has cut $44 million from its yearly costs by merging its warehouses and other operations with Shoppers. That should rise to $300 million by 2017.
The savings will help Loblaw pay down the loans it took out to complete the purchase. As of October 4, 2014, its long-term debt was $11.6 billion. That’s a high, but still manageable, 48% of its market cap.
The stock has gained 30% since the Shoppers purchase. Loblaw’s earnings should improve to $3.48 a share in 2015 from a projected $2.98 in 2014 as it realizes more benefits from this deal. The stock trades at 17.0 times the 2015 forecast. The $0.98 dividend yields 1.7%.
Loblaw is a buy recommendation of The Successful Investor.
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