METRO INC. $67 (Toronto symbol MRU; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 93.1 million; Market cap: $6.2 billion; Price-to-sales ratio: 0.5; Dividend yield: 1.5%; TSINetwork Rating: Average; www.metro.ca) operates about 600 supermarkets in Quebec and Ontario. It also has over 250 drugstores under the Brunet, The Pharmacy and Drug Basics banners.
Metro has aggressively cut costs and improved its efficiency in response to rising competition from larger Canadian chains like Loblaw and Sobeys, as well as big U.S. retailers like Wal-Mart and Costco. It also upgraded its stores and lowered its advertising costs by converting its various banners in Ontario to the Metro and Food Basics brands.
Cost cuts fuel big earnings jump
Metro’s sales rose 12.0%, from $10.7 billion in 2008 to $12.0 billion in 2012 (fiscal years end September 30). Earnings rose 67.6%, from $280.8 million to $470.6 million. Metro is an aggressive buyer of its own shares. As a result, earnings per share jumped 87.5%, from $2.48 to $4.65.
The company is also fueling its growth with acquisitions. For example, in October 2011, Metro paid $161.4 million for 55% of Marché Adonis, which sells Mediterranean-style foods through five stores in Quebec. It also distributes foods to other retailers through warehouses in Montreal and Toronto. Metro’s Marché Adonis interest contributed $236.6 million to its 2012 sales.
Rising competition has also prompted Metro to restructure its Ontario operations. Its plan involves 15 stores that it will close or convert to its discount Food Basics banner. It expects to pay $40 million in severance payments and other related costs.
New Target deal is a nice fit
Over the longer term, the company’s earnings should also benefit from a new deal to operate the pharmacies inside Target Corp.’s (New York symbol TGT) department stores in Quebec. Target plans to open 25 stores in that province over the next year. Metro already operates around 190 drugstores in Quebec, so it can use its existing distribution networks to supply these new outlets.
The company recently sold half its stake in Alimentation Couche-Tard (Toronto symbol ATD.B), which operates convenience stores in North America and Norway. (Couche-Tard is a recommendation of Stock Pickers Digest, our newsletter that focuses on aggressive investing.) That left Metro with a 5.7% economic interest and a 17.0% voting interest in Couche-Tard.
Balance sheet is getting stronger
Metro used the $472.6 million it received from this sale to cut its long-term debt by 32.7%, from $973.9 million at the end of 2012 to $655.9 million, or 11% of its market cap, on July 6, 2013. The company also held cash $88.4 million, or $0.95 a share.
The stock trades at a reasonable 13.5 times the $4.96 a share that Metro will probably earn in fiscal 2013. The $1.00 dividend yields 1.5%.
Metro is a buy.
