Expanding Stores And Discount Focus Will Increase Canadian Retailer's Future Market Share

Key Takeaways

• Expansion of store base and focus on discount retail could boost long-term sales growth and market share.
  
• Growth in Pharmacy and healthcare services, along with efficient cost management, could enhance earnings and margins.
  
• Increased consumer shift to discount stores and operational challenges from currency fluctuations and strategic exits may pressure Loblaw's revenue growth and margins.

Catalysts

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

• Loblaw is focusing on expanding its store base, planning to open more new stores in the following year than this year, which could enhance long-term sales growth and increase total revenue.
  
• The continued move towards discount retail and the introduction of innovative, low-cost store formats could attract more price-sensitive customers and expand market share, positively impacting revenue.
  
• Loblaw's focus on growing its Pharmacy and healthcare services, including strength in prescription and healthcare services growth, indicates potential for margin expansion and increased earnings as these services tend to have higher margins than traditional retail.
  
• The company's effective inventory management, efforts to improve shrink, and controlling SG&A expenses could improve net margins, aiding future earnings performance.
  
• The strong performance and growth in online sales, along with strategic initiatives such as the no-name pilot stores and focus on value, suggest potential to drive revenue growth and sustain earnings momentum.

Loblaw Companies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Loblaw Companies's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.7% today to 3.2% in 3 years time.
• Analysts expect earnings to reach CA$2.1 billion (and earnings per share of CA$8.02) by about December 2027, down from CA$2.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.3x on those 2027 earnings, up from 25.8x today. This future PE is greater than the current PE for the CA Consumer Retailing industry at 25.3x.
• Analysts expect the number of shares outstanding to decline by 3.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.79%, as per the Simply Wall St company report.

Loblaw Companies Future Earnings Per Share Growth

Risks

• Increased consumer shifts to discount stores over conventional banners may impact Loblaw's revenue if the trend continues and exacerbates margin pressures on higher-margin products.
  
• The weaker Canadian dollar's impact on food inflation could raise operational costs, affecting net margins as the company may not fully pass these costs onto consumers without affecting customer traffic.
  
• Exit from low-margin electronics, while strategic, may impact short-term revenue growth and pressure the front store sales performance next year.
  
• The focus on aggressive store openings and conversion plans could lead to higher upfront costs, affecting net earnings if the expected revenue uplift isn’t realized quickly.
  
• Decisions such as the discontinuation of multi-buys may impact short-term sales, and the ongoing need for shrink improvements suggests risk to overall gross margin performance if these issues persist.

Valuation

• The analysts have a consensus price target of CA$192.0 for Loblaw Companies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$217.0, and the most bearish reporting a price target of just CA$135.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$66.5 billion, earnings will come to CA$2.1 billion, and it would be trading on a PE ratio of 28.3x, assuming you use a discount rate of 5.8%.
• Given the current share price of CA$190.91, the analyst's price target of CA$192.0 is 0.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.