Digital Competition And Rising Costs Will Erode Retail Fundamentals

Key Takeaways

• E-commerce disruption and shifting consumer values threaten Loblaw's relevance, as digital lag and outdated offerings risk eroding market share and revenue resilience.
  
• Intensifying competition, brand perception issues, and technology gaps may suppress profitability through margin pressures, regulatory scrutiny, and higher operational costs.
  
• Strategic investments in automation, private label growth, and expansion into new markets are enhancing margins, customer loyalty, and positioning Loblaw for sustained long-term earnings growth.

Catalysts

A food and pharmacy company, provides grocery, pharmacy and healthcare services, health and beauty products, apparel, general merchandise, financial services, and wireless mobile products and services in Canada and the United States.

• The ongoing shift toward online grocery and delivery platforms, especially from tech giants and pure-play e-commerce competitors, poses a significant risk to Loblaw's traditional in-store traffic and could ultimately erode future market share and revenue growth as digital adoption outpaces Loblaw's current capabilities and limits top-line expansion.
  
• Demographic changes and evolving consumer expectations around health, convenience, and sustainability could make Loblaw's existing product and format mix less relevant over the coming years if adaptations are not fast or effective enough, pressuring same-store sales growth and undermining revenue resilience.
  
• Persistent macroeconomic headwinds, including inflation and elevated cost-of-living pressures, are fueling intensifying price competition from discounters and global retailers. This could constrain Loblaw's ability to pass on rising input costs, resulting in sustained margin pressure and lower net earnings growth.
  
• Brand perception issues associated with alleged greedflation and anti-competitive practices may intensify regulatory and public scrutiny, leading to potential revenue loss, customer attrition, and increased compliance costs that put downward pressure on net margins and long-term profitability.
  
• While Loblaw is investing in digitization and supply chain automation, lagging behind global competitors in the rapid deployment of AI, automation, and advanced technology could leave the company with higher labor and logistics expenses relative to peers, diluting operational efficiency gains and restricting EBITDA margin improvements in a tech-disrupted retail landscape.

Loblaw Companies Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Loblaw Companies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Loblaw Companies's revenue will grow by 3.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 3.6% today to 3.5% in 3 years time.
• The bearish analysts expect earnings to reach CA$2.4 billion (and earnings per share of CA$8.36) by about August 2028, up from CA$2.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 24.7x on those 2028 earnings, down from 30.8x today. This future PE is greater than the current PE for the CA Consumer Retailing industry at 23.0x.
• Analysts expect the number of shares outstanding to decline by 2.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.33%, as per the Simply Wall St company report.

Loblaw Companies Future Earnings Per Share Growth

Risks

• Loblaw demonstrated robust, broad-based revenue growth across multiple retail banners, and the management emphasized that this momentum is expected to continue as the company accelerates store openings and banner conversions, which will likely drive higher long-term revenue and support future earnings growth.
  
• The company's investments in AI-driven supply chain automation, personalized marketing through the PC Optimum loyalty program, and the adoption of new digital tools for store operations are delivering measurable operational efficiencies and cost savings, positioning Loblaw to enhance operating margins and net earnings over time.
  
• Expansion of high-margin private label products and increasing market share in both hard discount and supermarket banners are strengthening customer loyalty and gross margin, supporting an upward trend in net profits.
  
• The pharmacy segment, particularly Shoppers Drug Mart and health clinics, continues to show strong sales growth and resilience, benefiting from long-term demographic trends such as an aging population, which should bolster recurring revenues and EBITDA.
  
• The successful launch and strong performance of TNT stores in both Canada and the U.S. indicate substantial untapped growth potential in multicultural and fresh offerings, which, if sustained, could lead to outperformance in both top-line growth and earnings over the long run.

Valuation

• The assumed bearish price target for Loblaw Companies is CA$175.88, which represents two standard deviations below the consensus price target of CA$235.09. This valuation is based on what can be assumed as the expectations of Loblaw Companies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$267.0, and the most bearish reporting a price target of just CA$148.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CA$68.8 billion, earnings will come to CA$2.4 billion, and it would be trading on a PE ratio of 24.7x, assuming you use a discount rate of 6.3%.
• Given the current share price of CA$228.07, the bearish analyst price target of CA$175.88 is 29.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.