Metro Earnings: Discount Aisle Bolsters Strong Sales Growth as Internal Food Costs Swell

We don’t plan a material change to our CAD 68 fair value estimate for no-moat Metro MRU, 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.

Total sales popped 9.6% to CAD 6.4 billion (8.2% year to date), well ahead of our 5.6% full-year estimate. As food basket inflation remains high (8% in the quarter) and consumers’ quest for value gains prowess, Metro’s discount banner and private label, which outpaced branded sales, continue to resonate with consumers, fueling strong 9.4% food same-store sales growth. In pharmacy, same-store sales growth continued to moderate to 5.9% (7.2% in the third quarter of fiscal 2022) as outsize pandemic demand goes back to normal. That said, we are pleased with Metro’s ability to maintain growth in the category thanks to the expansion of pharmacy services, similar to initiatives at no-moat Loblaw. Ultimately, the shift in mix, coupled with reduced food gross margins, pushed Metro’s consolidated gross margin down by 20 basis points to 19.6%, just shy of our 20% full-year estimate. Likewise, although operating expenses decreased by 20 basis points to 10.1% of sales in the quarter, it still tracks above our 9.8% full-year estimate year to date, partially due to costs associated with its loyalty program rollout. We suspect ongoing wage-related labor disputes could add greater downward pressure.

Overall, we believe Metro is executing on its core initiatives, a necessity in the highly competitive retail space. The firm’s new Moi loyalty program has reached 2.2 million members since its initiation in late May. For context, Loblaw’s program boasts over 15 million users and is a key pillar to gathering shopping insights and driving traffic through promotion. We believe Metro can derive similar benefits, particularly as the firm increasingly leans on discount concepts, bolstering our 3% average long-term sales forecast.