Loblaw Companies Ltd.

On Wednesday, Loblaw Companies Ltd. (Loblaw) reported positive results, announcing that it is launching home delivery in Canada and closing 22 underperforming stores.

Of note:

  • The company posted higher than expected quarterly profit with a 0.3 per cent increase in revenue compared to the previous year, 1.4 per cent rise for food retail same store sales and a 3.3 per cent increase in drug retail. 
  • The company posted higher than expected quarterly profit with a 0.3 per cent increase in revenue compared to the previous year, 1.4 per cent rise for food retail same store sales and a 3.3 per cent increase in drug retail.

Compared to third quarter 2016 revenue was flat at $14.19 billion but beat analysts’ estimates of $14.10 billion.

Galen Weston, Chairman and CEO noted that 2018 was going to be tough because of an increasingly competitive market and the external cost pressures. New entrants are also adding to the competition, says Weston. "Our objective is to take costs out of the SG&A line so that they don't have to be passed on to the customer.”

However, Michael Van Aelst and Evan Frantzeskos of TD Waterhouse, in a report, said that based on the positive results, they expect shares to outperform. Here's their take on the Q3 results:

Q3/17 First Glance: Strong Results

Outlook: 2017 guidance was unchanged, but 2018 guidance comes across as much more positive, in our view, and now implies EPS growth in 2018.

Impact: POSITIVE 

  • Adjusted EBITDA (+6 per cent excluding gas bar divestiture and consolidation of more franchisees) was marginally better than expected, aided by strong performance in Financial Services and good operating cost controls.
  • Food Retail same-store sales (excluding gas) came in at 1.4 per cent, in line with our 1.5 per cent estimate: This was the fifth straight quarter of tonnage growth (+1 per cent), helped by increased traffic (first time this year) and basket.
  • Loblaw's basket inflation was 0.4 per cent, turning positive for the first time in five quarters, and the company expects it to move higher over the next few quarters.
  • The 2017 outlook remains unchanged, although the 2018 outlook statement now implies EPS growth
  • Loblaw said it has made significant progress toward mitigating the impact of the minimum wage increase ($190 mm impact in 2018) and the expected announcement of incremental drug reform.
  • Including the closing of 22 unprofitable stores, the elimination of 500 positions and the potential of a 0.79 per cent “supply chain handling charge” to suppliers, it’s estimated that the savings could be more than $235 mm
  • Loblaw also plans on increasing the number of stores in its Click & Collect program and teaming up with Instacart to launch an online home delivery service. Groceries ordered from Loblaws, Real Canadian Superstore and T&T stores will be delivered to customers' homes by Instacart in as little as one hour, beginning in Toronto on December 6, and in the Greater Vancouver Area in January 2018. Rapid expansion to additional markets across Canada is expected throughout 2018.
  • According to the Toronto Star, there will be a service fee of 7.5 per cent of the order in addition to a delivery fee that will begin at $3.99 and that will vary depending on the size of the order and delivery time selected.
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