Loblaw Companies Ltd. $51 – Toronto symbol L

LOBLAW COMPANIES LTD. $51 (Toronto symbol L; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 274.1 million; Market cap: $14.0 billion; SI Rating: Above average) is Canada’s largest food seller, with about 1,700 stores under the Loblaws, Fortinos, No Frills, Provigo and Zehrs banners. It also distributes groceries to other stores. George Weston Ltd. owns 63% of Loblaw’s shares.

In 2004, the company began a major restructuring in the face of growing competition from Wal- Mart and Costco. It expanded the amount of non-food merchandise its stores carry, and consolidated its distribution centres.

However, problems with the new distribution system led to shortages of popular items at some stores. In addition, the new merchandise did not draw as many customers as Loblaw hoped.

The company now plans to scale back its non-food operations and sell its excess inventory. This will cost it up to $120 million. That’s in addition to previously announced store closures and other streamlining initiatives that will cut its pre-tax profits by roughly $310 million.

To put these figures in perspective, Loblaw earned $0.74 a share (total $203 million) in the third quarter of 2006.

These moves should eventually cut Loblaw’s annual expenses by $75 million. That will give it more flexibility to lower prices, and make its stores more appealing.

The stock fell to $43 in November 2006, but has moved up lately. It now trades at 16.1 times the $3.17 it will probably earn in 2007, which is low in light of the company’s high market share. But that earnings figure will suffer if Loblaw fails to straighten out its supply problems. The $0.84 dividend seems safe, and yields 1.6%.

Loblaw is a hold.

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