Blue chip retailer meets challenges with new initiatives

For four years, this retailer has enjoyed a boost in sales and revenues from a big acquisition, but now it faces new challenges.

Facing the threat of higher costs and lower margins, as well as the effects of a price-fixing scandal, the company is launching new initiatives. One is installing more automated checkouts, while another is its plan to launch medical marijuana sales.


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LOBLAW COMPANIES LTD. (Toronto symbol L; www.loblaw.ca) operates 1,095 supermarkets across Canada. It also owns the Shoppers Drug Mart chain of 1,330 drugstores.

In the three months ended December 30, 2017, overall sales fell 0.9%, to $11.03 billion from $11.13 billion a year earlier. That’s mainly because the company sold all of its 213 gas stations in July 2017 for $540 million.

Excluding gasoline purchases, same-store sales at its supermarkets rose 0.5%. The increase was mainly due to slightly higher food volumes and prices.

Same-store sales for Shoppers Drug Mart rose 3.6%. That reflects a 3.9% rise in prescription drug sales and a 3.5% increase in the sale of other merchandise.

Earnings in the quarter rose 12.2%, to $441 million from $393 million a year earlier. Earnings per share gained 16.5%, to $1.13 from $0.97, on fewer shares outstanding. That beat the consensus forecast of $1.11.

The latest earnings exclude a $107 million charge related to Loblaw’s role in a scheme to fix prices. In March 2015, Loblaw and Weston discovered that certain employees colluded with other producers and retailers to fix the price of processed bread products between 2001 and 2015. The companies reported that information to the federal Competition Bureau and have cooperated with the subsequent investigation.

As part of a settlement with the federal Competition Bureau, the company is handing out $25 gift cards to consumers. Shoppers can register at www.LoblawCard.ca to receive one card each redeemable for merchandise at Loblaw’s grocery stores. They do not need to provide proof of any purchases. The company expects the gift card program will cost it between $75 million and $150 million.

Blue Chip Stocks: Stock trades at just 14 times forecast earnings for 2018

The company faces several challenges in 2018. Those include higher minimum wages in Ontario, Alberta and other provinces. In addition, a new deal between government health agencies and pharmaceutical makers will cut the selling prices of generic drugs, and squeeze the profit margins at its drugstores.

Loblaw plans to offset some of those costs with new initiatives such as installing more automated checkout stations. The merger of its supermarket and Shoppers Drug Mart loyalty points plans should also cut its expenses.

One new initiative was announced in December 2017, when Loblaw formed a new alliance with medical marijuana producer Aphria Inc. (Toronto symbol APH).

The two companies have yet to reveal the financial terms of this five-year deal; it will make Aphria the preferred—but not exclusive—supplier of medical marijuana products to Shoppers Drug Mart.

The agreement does not include marijuana for recreational use; the federal government plans to legalize recreational marijuana by the fall of 2018.

Subsequently, Shoppers has entered into arrangements with two more medical marijuana producers, MedReleaf and Tilray Canada.

Shoppers Drug Mart is still waiting for a licence to distribute medical marijuana. However, a licence would only let it sell those products online (and deliver by mail) instead of in its physical stores. It’s possible that Ottawa could eventually relax those regulations, particularly for Shoppers outlets in hospitals or near doctor’s offices.

In line with its policy of adding healthier, more sustainable food, Loblaw has also introduced powder made from milled crickets that can be used for baking, mixing smoothies or as a garnish on other foods. Available under the President’s Choice label, cricket powder is considered an excellent source of protein and vitamins.

The company last raised its dividend by 3.8% with the July 2017 payment, to $0.27 a share from $0.26. The current annual rate of $1.08 yields 1.6%.

The company will probably earn $4.64 a share in 2018. The stock trades at an attractive 14.4 times that forecast.

Recommendation in The Successful Investor: Loblaw is a buy.

For our views on how to make the right decisions with blue chip stocks, read The top blue chip stocks all share these common characteristics.

For our recent report on another leading Canadian blue chip stock, read Change spells good news for this information provider.

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