Loblaw looks to grow beyond food

…squeezing out additional growth is becoming a challenge…Even as the stock soars, Loblaw's profit growth is slowing.

The Globe and Mail
February 9, 2005

Loblaw looks to grow beyond food
With a 40-per-cent market share, grocer needs to squeeze out profit elsewhere.
John Heinzl

Shares of Loblaw Cos. Ltd. have been on a roll. But are the wheels on the shopping cart about to seize up?

Canada's biggest grocer — which reports fourth-quarter results this morning — has been one of the country's great growth stories. A person who invested $10,000 in 1995 and plowed back all dividends would be sitting on about $93,000 today. That's a lot of President's Choice chocolate chip cookies.

But now that Loblaw dominates the Canadian grocery landscape, with roughly a 40-per-cent market share, squeezing out additional growth is becoming a challenge. It's especially tough with smart competitors such as Wal-Mart Stores Inc. and Shoppers Drug Mart Inc. expanding their grocery aisles.

To drive share profit higher, Loblaw is becoming increasingly reliant upon cost cutting and share buybacks, UBS Securities Canada Inc. analyst Jason Bilodeau said in a note to clients this week.

"We fear this will attract a lower [price-earnings] multiple going forward, likely curbing share price appreciation from current levels," Mr. Bilodeau said. He has a "neutral" rating and a price target of $76 on the stock, which trades at about 18 times estimated 2005 earnings.

The shares closed at $74.25 yesterday on the Toronto Stock Exchange, up $2.14. They have risen about 22 per cent since last September.

Even as the stock soars, Loblaw's profit growth is slowing. In the late 1990s, Loblaw routinely posted annual share profit growth of more than 20 per cent, according to Bloomberg data. By 2003, growth had slowed to about 18 per cent. For 2004, analysts surveyed by Thomson First Call expect an increase of just 15 per cent.

Betting against Loblaw would have been unwise in the past, of course, and it's not like the company lacks a game plan.

The retailer is fighting back by offering more general merchandise in its stores and expanding its Real Canadian Superstore chain. As well, Loblaw is always exploring ways to broaden its President's Choice brand, which began as a line of food products but now includes everything from credit cards to fire logs.

"Pursuit of growth for Loblaw will start with food but not end there," Merrill Lynch analyst Patricia Baker said in a December report that pointed to "very impressive share gains" in general merchandise.

As for today's fourth-quarter results, analysts expect share profit of $1.23, up 16 per cent from $1.06 a year earlier. But with competition heating up and growth harder to come by, investors may be more interested in the company's outlook for the rest of 2005 and beyond.

Mr. Bilodeau, for one, expects management "to set more moderate growth expectations" for the year ahead.

Last close $74.25
Change from previous Up $2.14
52-week intraday high $75.14
52-week intraday low $58.20
P/E ratio, trailing 21.97
Dividend yield 1.02%
Market cap $20.3-billion
Price/book ratio 3.97
1-year total return 13%
Revenue, Q3 2004 $8.1-billion
Profit, Q3 2004 $258-billion


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