Company Reports

We plan to maintain our CAD 69 fair value estimate for no-moat Metro after absorbing its second-quarter results, with sales up 2% and adjusted EPS down 5%. With the transition to the new Quebec distribution center progressing well, we are maintaining our 2024 projection for a 3% sales growth (on flattish volumes) and a 1% decline in adjusted EPS. Our 10-year forecast for low-single-digit top-line growth and an average operating margin of 6.5% remains in place, and we view shares as slightly undervalued.

As the smallest of the three pure-play food retailers in Canada, Metro has done a commendable job fending off competition in its core Ontario and Quebec markets with prudent merchandising strategies and strong execution. That said, similar to larger rival Loblaw, we think ferocious price competition in the commoditized grocery market has prevented Metro from amassing any intangible assets or cost advantage to warrant an economic moat rating.

We plan to maintain our CAD 69 fair value estimate for no-moat Metro after absorbing the grocer’s first-quarter results, with sales up 6.5% and adjusted EPS up 2%, in line with our estimates. We maintain our 2024 estimates for 3.4% sales growth on moderating food price inflation and a 1% decline in adjusted EPS due to costs associated with the newly opened distribution center in Quebec. Our 10-year forecasts for low-single-digit top-line growth and operating margins averaging 6.5% remain in place. Shares strike us as fairly valued.

As the smallest of the three pure-play food retailers in Canada, Metro has done a commendable job fending off competition in its core Ontario and Quebec markets with prudent merchandising strategies and strong execution. That said, similar to larger rival Loblaw, we think ferocious price competition in the commoditized grocery market has prevented Metro from amassing any intangible assets or cost advantage to warrant an economic moat rating.

We plan to maintain our CAD 69 fair value estimate for no-moat Metro, as we balance solid results from the fourth quarter of fiscal 2023 (sales up 14% and adjusted EPS, excluding the strike impact, up 20%) against a cautious 2024 outlook. Management expects the underutilization of its newly expanded distribution capacity will drive up costs and cause a 1% contraction in adjusted EPS in the year ahead. We plan to reduce our fiscal 2024 earnings estimate to align with guidance but believe the capacity underutilization is temporary given strong e-commerce trends. We see no need to change our 10-year projections calling for low-single-digit top-line growth and operating margins averaging 6.5%. Shares strike us as fairly valued.

We believe Canadian grocers Loblaw, Metro, and Loblaw’s parent George Weston, have failed to build a durable competitive edge, given the commoditized nature of food retail where low prices remain the key point of differentiation. We’ve tweaked our valuations but see value in George Weston’s shares.

As the smallest of the three pure-play food retailers in Canada, Metro has done a commendable job fending off competition in its core Ontario and Quebec markets with prudent strategies and strong execution. That said, similar to larger rival Loblaw, we think ferocious price competition in the commoditized grocery market has prevented Metro from amassing any intangible assets or cost advantage to warrant an economic moat rating.

Despite being the smallest of the Big Three Canadian pure-play grocers, Metro has punched above its weight through laudable strategy and execution, in our view. In food stores, the firm centered its strategy on customer segmentation, providing the right products and services to the right consumer at the right price points. We think it has done a good job highlighting the value proposition of each of its stores, with banners like Metro Plus offering broad assortments and topnotch service, Super C focusing on affordability, and Adonis targeting niche audiences with lineups of fresh and ethnic wares. Metro scaled up its pharmacy arm with the acquisition of Jean Coutu (the largest pharmacy chain in Quebec), through which it achieved the targeted CAD 75 million in annualized cost savings, benefited from greater distribution and cross-selling of private labels, and positioned itself to better navigate uncertainties around any drug pricing regulation change.

We don’t plan a material change to our CAD 68 fair value estimate for no-moat Metro, as we balance better-than-anticipated third-quarter sales growth against profitability that tracks just below our fiscal 2023 forecast. As such, we view shares as fairly valued.

Despite being the smallest of the Big Three Canadian pure-play grocers, we think Metro has punched above its weight through laudable strategy and execution. In food stores, the firm centered its strategy around customer segmentation, providing the right products and services to the right consumer at the right price points. We think it has done a good job highlighting the value proposition of each of its stores, with banners like Metro Plus offering broad assortments and topnotch service, Super C focusing on affordability, and Adonis targeting niche audiences with lineups of fresh and ethnic wares. Metro scaled up its pharmacy arm with the acquisition of Jean Coutu (the largest pharmacy chain in Quebec), through which the firm achieved the targeted CAD 75 million in annualized cost savings, benefited from greater distribution and cross-selling of private labels, and positioned itself to better navigate uncertainties around any drug pricing regulation change in Canada.

We don’t plan any material change to our CAD 66 fair value estimate for no-moat Metro after digesting its second-quarter results. With shares trading 15% above our intrinsic valuation, we suggest investors await a more compelling risk/reward.

Despite being the smallest of the Big Three Canadian pure-play grocers, we think Metro has punched above its weight through laudable strategy and execution. In food stores, the firm has centered its strategy around customer segmentation, providing the right products and services to the right consumer at the right price points. We think it has done a good job highlighting the value proposition of each of its stores, with banners like Metro Plus offering broad assortments and topnotch service, Super C focusing on affordability, and Adonis targeting niche audiences with lineups of fresh and ethnic wares.

After digesting first-quarter results at no-moat Metro, we plan to lift our CAD 65 fair value estimate by a low-single-digit percentage, as we account for higher inflation in fiscal 2023. With shares trading roughly 15% north of our intrinsic valuation, we’d suggest investors remain on the sidelines.

Despite being the smallest of the Big Three Canadian pure-play grocers, we think Metro has punched above its weight through laudable strategy and execution. In food stores, the firm has centered its strategy around customer segmentation, providing the right products and services to the right consumer at the right price points. We think it has done a good job highlighting the value proposition of each of its stores, with banners like Metro Plus offering broad assortments and topnotch service, Super C focusing on affordability, and Adonis targeting niche audiences with lineups of fresh and ethnic wares.

No-moat Metro delivered solid (September-ended) fiscal 2022 fourth-quarter results, with its sales growing 8.3% to CAD 4.43 billion, although primarily driven by inflation. The strength was broad-based, with both food and pharmacy same-store sales advancing 8.0% and 7.4%, respectively. In its food segment (roughly 75% of sales, by our estimate), 10% food basket inflation implies significant trade-down activities, given Metro’s tonnage growth (unquantified) in the quarter. In fact, management suggested sequential acceleration in promotion and private-label penetration, trends we don’t perceive abating in the near term, given elevated inflation levels. However, we are still encouraged by the traffic growth in the quarter, which we think was partially achieved through Metro’s expanded click-and-collect offerings across its stores and increased sales channels via partnerships with Cornershop and Instacart. In addition, Metro’s plan to launch an upgraded Moi loyalty program in Quebec (upcoming spring) should help attract and retain customers, allowing Metro to remain relevant in the competitive market in which it plays.

Despite being the smallest of the big three Canadian pure-play grocers, we think Metro has punched above its weight through laudable strategy and execution. In food stores, the firm has centered its strategy around customer segmentation, providing the right products and services to the right consumer at the right price points. We think it has done a good job highlighting the value proposition of each of its stores, with banners like Metro Plus offering broad assortments and topnotch service, Super C focusing on affordability, and Adonis targeting niche audiences with lineups of fresh and ethnic wares.

Despite being the smallest of the big three Canadian pure-play grocers, we think Metro has punched above its weight through laudable strategy and execution. In food stores, the firm has centered its strategy around customer segmentation, providing the right products and services to the right consumer at the right price points. We think it has done a good job highlighting the value proposition of each of its stores, with banners like Metro Plus offering broad assortments and topnotch service, Super C focusing on affordability, and Adonis targeting niche audiences with lineups of fresh and ethnic wares.

Sharing a similar macro landscape and customer base as no-moat Loblaw, no-moat Metro posted third-quarter marks largely akin to its larger competitor. Metro’s total sales were up 2.5%, primarily driven by its pharmacy same-store sales growth of 7.2% (around 25% of sales, by our estimate), 1% of which were contributed from COVID-19-related activities and the rest from the growth in OTC and cosmetics. Food same-store sales (75% of sales), however, remained flat (up 0.8%) in the quarter. And as we anticipated, the internal food basket inflation of 8.5% (on top of 5% in the previous quarter) further accelerated the shift from conventional to discount stores, trade down activities, and promotion penetration (per management).

Despite being the smallest of the big three Canadian pure-play grocers, we think Metro has punched above its weight through laudable strategy and execution. In food stores, the firm has centered its strategy around customer segmentation, providing the right products and services to the right consumer at the right price points. We think it has done a good job highlighting the value proposition of each of its stores, with banners like Metro Plus offering broad assortments and topnotch service, Super C focusing on affordability, and Adonis targeting niche audiences with lineups of fresh and ethnic wares.

After digesting tepid second-quarter results in line with our expectations, we don’t expect to materially alter our CAD 62 fair value estimate and see shares as overvalued. Metro demonstrated resilience during the quarter, with sales up 1.9% year over year, despite prolonged headwinds in supply chain, labor shortages, and inflation. Food inflation accelerated to 5% in the quarter (on top of 3% last quarter), supporting faster growth of discount banners, private labels, and promotional penetration at the expense of conventional banners and non-private label products. Food same-store sales were 0.8%, which we don’t view as disappointing, given the 5.5% and 10% gains chalked up in the respective comparable 2021 and 2020 periods (during the pandemic). With shifting consumer behavior toward lower-priced, promotional, and value-oriented products, we expect Metro’s food sales to remain flat this fiscal year. Meanwhile, pharmacy same-store sales were up 9.4% (against favorable 0.8% drop last year), primarily driven by less restrictive government measures (six-week ban on non-essential products sale in Quebec in last years' second quarter) and distribution of PCR tests. We expect healthy growth of the pharmacy division and view the segment to underpin Metro’s full-year top-line growth of 1.5%.