Loblaw Earnings: Strategic Investments and Focused Execution on Display, but Shares Look Pricey

No-moat Loblaw reported solid fiscal 2023 fourth-quarter results, including a 3.7% top-line growth and 13.6% adjusted earnings per share growth, which came close to our estimates. From our vantage point, these marks illustrate the retailer’s stringent focus on its value proposition; Canadian shoppers’ penchant for value persisted during the quarter (favoring promotions, private labels, and discount banners) as they strived to stretch their wallets. In this context, Loblaw is prudently investing in diverse facets of its business by converting several full-price stores into value formats, enhancing e-commerce capabilities (sales up 14.6%), and expanding its pharmacy services (such as walk-in clinics using excess space within its superstores), which we believe will collectively bolster the firm’s position as a one-stop shop for grocery and health needs. With its revenue disproportionately indexed to competitive food retail in Canada (67% of sales), we posit Loblaw would have to keep investing in price to stay relevant, leaving little room for pricing power or a cost advantage.