Drug store chain gives Loblaw a promising legal cannabis sales platform

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Through its drug stores, this grocer has expanded into online cannabis sales to registered prescription patients who can get their orders home-delivered or at their doctor’s office. A software partnership should also let the company offer more secure personalized medical marijuana sales.


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LOBLAW COMPANIES LTD., $66.86, symbol L on Toronto (Shares outstanding: 369.1 million; Market cap: $24.7 billion; www.loblaw.ca) operates 1,085 supermarkets under a variety of banners: Loblaw, 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 1,339 drug stores across Canada.

Loblaw feels its Shoppers Drug Mart stores give it a strong platform to profit from the legalization of cannabis. That’s because their pharmacy operations have experience distributing controlled substances and counselling customers about their effects.

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

The company’s stores do not carry cannabis. Instead, prescription-holding patients who register with Shoppers can purchase cannabis from one of the chain’s licensed producers. They then sends 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.

Shoppers is now teaming up with California-based software developer TruTrace Technologies. It will use TruTrace’s blockchain technology to identify, track and verify the source of its cannabis-based drugs. Blockchain is essentially a decentralized database that records transactions and tracks the movement of assets.

The software should make it easier for doctors to prescribe the correct cannabis strains to their patients. That should help convince more doctors and patients to consider cannabis-based treatments instead of regular drugs.

Meantime, 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 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 $290 million from ongoing operations in the three months ended March 23, 2019. That’s down 7.1% from $312 million a year earlier. Due to fewer shares outstanding, per-share earnings declined at a slower rate of 3.7%, to $0.78 from $0.81. However, if you factor out a new accounting rule related to its leases, Loblaw earned $0.84 a share in the latest quarter.

Revenue rose 3.1%, to $10.66 billion from $10.34 billion a year earlier. Same-store sales for the company’s supermarkets improved 2.0%. Higher volumes ahead of the Easter holiday offset a slight decline in average prices.

Shoppers Drug Mart’s same-store sales rose 2.2%. The gain reflects a 1.2% increase in prescription drug sales and a 3.1% rise in the sale of other merchandise.

Loblaw is a buy.


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