Company Reports

As Canada’s largest food and pharmacy retailer, Loblaw, in theory, should be well-equipped to navigate an increasingly competitive market. However, despite its 23.6% share of national food-and-pharmacy sales, we believe it lacks enduring intangible assets or the structural cost advantage of globally scaled price leaders such as Walmart and Costco. We view its strategy of using a multibanner grocery network and Shoppers Drug Mart to capture demand across income levels and healthcare needs as a necessary means of defending relevance and profitability in a market without switching costs, rather than a path to establishing a durable competitive edge.

During its Sept. 9 investor day, Loblaw offered greater insight into executing against its long-term financial framework without altering its underlying strategic road map. Management reaffirmed its low-sales-growth operating model, emphasizing execution, cost discipline, and store expansion.

As Canada’s largest food and pharmacy retailer, Loblaw in theory should be well-equipped to navigate an increasingly competitive market. However, despite its 23.6% share of national food-and-pharmacy sales, we believe it lacks enduring intangible assets or the structural cost advantage of globally scaled price leaders such as Walmart and Costco. We view its strategy of using a multibanner grocery network and Shoppers Drug Mart to capture demand across income levels and healthcare needs as a necessary means of defending relevance and profitability in a market without switching costs, rather than a path to establishing a durable competitive edge.

As Canada's largest food and pharmacy retailer, Loblaw is working to navigate an increasingly competitive market by leveraging its conventional and discount grocery network as well as Shoppers Drug Mart to capture demand across income levels while competing with globally scaled rivals.

Loblaw's second-quarter results featured a 4.1% increase in revenue and an 8% jump in adjusted EPS to CAD 0.62. Food retail same-store sales grew 1.6%, while drug retail same-store sales rose 4.6%. Retail gross margin expanded 10 basis points to 32.2% due primarily to improvement in shrinkage.

Loblaw's first-quarter revenue increased 4.2% from last year to $14.4 billion, with food and drug retail sales increasing 3.9% and 4.8%, respectively. Adjusted EBITDA margin expanded 20 basis points to 11.1%, driven by increased operating leverage partially offset by distribution center buildouts.

As the largest retailer in Canada, Loblaw boasts well-recognized grocery and drugstore banners and a sizable loyalty program that drives strong consumer engagement. That said, we think the firm has not carved out an economic moat based on intangible assets or cost advantage, given its sales concentration in commoditized food retail, where low prices reign as the major point of differentiation.

As the largest retailer in Canada, Loblaw boasts well-recognized grocery and drugstore banners and a sizable loyalty program that drives strong consumer engagement. That said, we think the firm has not carved out an economic moat based on intangible assets or cost advantage, given its sales concentration in commoditized food retail, where low prices reign as the major point of differentiation.

Loblaw's fourth-quarter revenue rose 11.3%, with food retail up 3.1% and drugstore up 4.4%. Adjusted EBITDA margin held at 10.8%. Full-year adjusted EPS grew 13.6% (including the 53rd week), in line with low-double-digit guidance. Management expects high-single-digit EPS growth in fiscal 2026.

Loblaw grew sales by 4.6% in the third quarter, driven by increases of 4.8% and 3.8% in food retail and drugstore, respectively. Adjusted EBITDA rose 7.2% as margins widened 20 basis points to 11.4%. Management raised the 2025 outlook for adjusted EPS growth to low teens from high-single digits.

As the largest retailer in Canada, Loblaw boasts well-recognized grocery and drugstore banners and a sizable loyalty program that drives strong consumer engagement. That said, we think the firm has not carved out an economic moat based on intangible assets or cost advantage, given its sales concentration in commoditized food retail, where low prices reign as the major point of differentiation.

Loblaw's sales grew by 5% in the second quarter on increases of 6% and 4% in food retail and drugstores, respectively. Adjusted EBITDA rose 7% as margins widened 20 basis points to 12.5%.

Loblaw's sales grew by 4.1% in the first quarter of 2025 on same-store sales growth of 2.2% and 3.8% in food and drugstore retail. Operating margin widened 10 basis points to 6.4%.

As the largest retailer in Canada, Loblaw boasts well-recognized grocery and drugstore banners and a sizable loyalty program that drives strong consumer engagement. That said, we think the firm has not carved out an economic moat based on intangible assets or cost advantage, given its sales concentration in commoditized food retail, where low prices reign as the major point of differentiation.

No-moat Loblaw's fiscal 2024 fourth-quarter results were mixed, as sales of $14.9 billion lagged our $15.3 billion assumption, but $2.20 in adjusted earnings per share exceeded our $2.13 forecast. Factoring in these results, along with guidance that corroborates our high-single-digit percentage increase for fiscal 2025 adjusted EPS growth, we don't plan any material changes to our CAD 135 fair value estimate but continue to view shares as overvalued. While we acknowledge Loblaw's extensive footprint and strong value appeal position it well to attract consumers, we believe investors may be overestimating its profit trajectory. We surmise fierce price competition will constrain gross margin expansion, while ongoing investment will be necessary to remain competitive in an industry with no switching costs, underpinning our no moat rating.

No-moat supermarket chain Loblaw’s investments in discount formats and healthcare services are paying off, as the firm delivered 2% top-line growth in the third quarter, despite cooling food price inflation and consumer belt-tightening. Diluted EPS grew 30%, reflecting a one-time benefit from tax recovery related to its financial services business, or up 11% on a comparable basis thanks to efficiency gains and a smaller share base due to buybacks. We plan to tick up our 2024 EPS growth forecast to 11% from 10% to account for the one-time benefit but see no change to our 10-year projections for 3% annual sales growth and operating margins in the 5%-6% range, leaving our CAD 135 per share fair value estimate in place. Shares look overvalued.

As the largest retailer in Canada, Loblaw boasts well-recognized grocery and drugstore banners and a sizable loyalty program that drives strong consumer engagement. However, we think the firm has not carved out an economic moat based on either intangible assets or cost advantage, given its sales concentration in commoditized food retail, where low prices reign as the major point of differentiation.

The impact of easing food price inflation in Canada was evident in the second-quarter results of no-moat Loblaw. Sales growth slowed to 1.5% with flattish same-store food sales, and adjusted net profits rose 6% on cost control. Loblaw has made prudent investments in discount banners, private label, and its loyalty program. However, the results reaffirm our view that the lack of brand intangibles in commodified food retail makes it difficult for Loblaw to maintain mid-single-digit sales growth in the past two years as food price inflation normalizes. We expect our 2024 estimates of sales and adjusted earnings per share to grow 3.6% and 9.5%, respectively, and our 10-year forecasts for 3% annual sales growth and operating margins averaging 5.2% to be unchanged. We plan to maintain our CAD 129 fair value estimate and view shares as overvalued.

As the largest retailer in Canada, Loblaw boasts well-recognized grocery and pharmacy banners and a sizable loyalty program that drives strong consumer engagement. However, we think the firm has not carved out an economic moat based on either intangible assets or cost advantage, given its sales concentration in commoditized food retail, where low prices reign as the major point of differentiation.

We don’t plan any material changes to our CAD 124 fair value estimate after absorbing no-moat grocer Loblaw’s solid first-quarter results, with sales and adjusted earnings per share up 5% and 11%, respectively. The update reaffirms our view that Loblaw remains well-positioned to capture grocery and drugstore spending amid consumer belt-tightening in Canada. This is thanks to its popular discount banners, strong private-label offerings, and precision marketing via its PC Optimum loyalty program. We see no need to change our 2024 estimates for sales and adjusted EPS to increase by 4% and 10%, respectively. Our 10-year forecasts for a 3% sales compound annual growth rate and operating margins averaging 5.2% remain. Shares look overvalued.