Pot, beer and loyalty should help boost earnings at Loblaw

Supermarkets and drugstores underpin continuing growth for this large Canadian business. It is now looking to expand with an improved loyalty rewards program, medical cannabis sales and a new budget beer label.

The company has also moved to trim its electricity costs as it seeks to beat consensus estimates for profitability.

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LOBLAW COMPANIES LTD. (Toronto symbol L; www.loblaw.ca) operates 1,085 supermarkets under several banners, including Loblaws, Zehrs, Provigo, Real Canadian Superstore and No Frills.

In March 2014, the company purchased the Shoppers Drug Mart chain for $12.3 billion in cash and shares. Shoppers now operates 1,337 drugstores across Canada.

Loblaw recently transferred its 61.6% stake in Choice Properties REIT, Toronto symbol CHP.UN, to its parent company George Weston Ltd., Toronto symbol WN. In exchange, Loblaw shareholders received 0.135 of a Weston common share for each Loblaw share they hold. They will not have to pay capital gains taxes until they sell their new Weston shares.

Following the transfer, Weston now owns 65.4% of the REIT. As well, Loblaw shareholders hold 16.8% of Weston’s shares.

If you exclude costs related to that transaction and other unusual items, Loblaw earned $388 million from ongoing operations in the three months ended December 29, 2018. That’s down 2.5% from $398 million a year earlier. However, due to fewer shares outstanding, per-share earnings gained 1.0%, to $1.03 from $1.02. That nonetheless missed the consensus estimate of $1.04.

Revenue in the quarter rose 2.1%, to $11.22 billion from $10.99 billion a year earlier.

Same-store sales for the company’s supermarkets improved 0.8% as higher food volumes offset lower average prices. Same-store sales for Shoppers Drug Mart rose 1.9%. The gain reflects a 0.6% increase in prescription drug sales and a 2.8% rise in the sale of other merchandise.

Loblaw continues to expand its popular PC Optimum loyalty rewards program. The plan currently has over 18 million members, who earn and redeem points at all of company’s supermarkets and drugstores.

Loyalty rewards are an increasingly important tool for retailers like Loblaw. Through a smartphone app or its website, the company typically offers members special deals based on their purchasing history. That helps spur repeat visits and higher spending per visit.

Loblaw has also launched a new “no name” beer in Ontario. The company will sell a six pack for $10.45. However, it plans to lower the price to just $6.60 (which includes $0.60 in bottle deposits) on long weekends. That will let it take advantage of the Ontario government’s recent move to cut the minimum retail price for beer from $1.25 a bottle (or can) to $1.00. Loblaw’s own low price should give its no name beer a sales advantage as consumers stock up ahead of holiday weekends.

Also, in January 2019, Shoppers began selling medical cannabis online to patients in Ontario.

The company’s stores will not carry cannabis. Instead, prescription-holding patients who register with Shoppers can purchase cannabis from one of the chain’s licensed producers. They will then send the medication to the patient’s home or doctor’s office.

As well, insurer Great-West Lifeco (Toronto symbol GWO) has agreed to participate in Shoppers Drug Mart’s Medical Cannabis Coaching Program.

Great-West has offered medical cannabis coverage since 2009. This new deal will make it easier for patients to access medical cannabis under their health insurance policies.

Shoppers will arrange delivery to the patient’s home. It will also provide follow-up services, such as counselling and other advice.

Blue Chip Stocks: Electricity-saving upgrades on the way

Loblaw now plans to make it easier for consumer product makers to reach those shoppers. The company will give PC Optimum members the option to earn more points by viewing targeted ads on websites and social media platforms. Shoppers do not have to purchase the product to receive the extra points.

The company plans to replace the refrigeration systems in 370 stores over the next three years. The new systems will use less electricity than the current ones, and reduce Loblaw’s emissions by 23% over the next three years.

The upgrades will cost $48 million. However, the federal government will contribute $12 million of that through its Low Carbon Economy Fund—an initiative to help Canadian companies, from small business to large corporations, reduce their emissions.

To put Loblaw’s investment in context, the company earned $1.5 billion, or $4.06 a share, in 2018.

With the June 2019 payment, Loblaw will raise its quarterly dividend by 6.8%. Investors will then receive $0.315 a share instead of $0.295. The new annual rate of $1.26 yields 1.9%.

Recommendation in The Successful Investor: Loblaw is a buy.


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