Automated Distribution Centers And Loyalty Programs Will Increase Efficiency And Customer Engagement

Key Takeaways

• Metro's supply chain modernization and expansion in loyalty programs are anticipated to enhance efficiencies, customer engagement, and drive revenue growth.
  
• Strategic growth in discount stores, pharmacy, and e-commerce is expected to boost market share and overall earnings.
  
• Intense competition and rising costs could challenge Metro's profitability and financial flexibility, demanding strategic investments and efficient supply chain management.

Catalysts

Through its subsidiaries, operates as a retailer, franchisor, distributor, and manufacturer in the food and pharmaceutical sectors in Canada.

• The completion of Metro's seven-year, nearly $1 billion supply chain modernization project, including new automated distribution centers, is expected to provide long-term efficiencies and scalability, which could positively impact net margins.
  
• With the launch and expansion of the MOI Rewards loyalty program in Ontario, Metro anticipates increased customer engagement, frequency, and spending, which could drive revenue growth.
  
• The plan to open a dozen new discount stores in fiscal '25, including conversions, indicates potential for increased market share and sales growth, particularly in the food retail segment.
  
• Metro's growing pharmacy division, aided by initiatives like increased offering of clinical services and specialty medication sales, is expected to contribute meaningfully to overall earnings growth.
  
• Continued expansion and investment in e-commerce capabilities, including click-and-collect services and partnerships for same-day delivery, are projected to support revenue growth despite current margin dilution.

Metro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Metro's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 4.7% in 3 years time.
• Analysts expect earnings to reach CA$1.1 billion (and earnings per share of CA$5.45) by about December 2027, up from CA$928.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.7x on those 2027 earnings, down from 21.8x today. This future PE is lower than the current PE for the CA Consumer Retailing industry at 25.3x.
• Analysts expect the number of shares outstanding to decline by 3.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.65%, as per the Simply Wall St company report.

Metro Future Earnings Per Share Growth

Risks

• A decrease in total sales by 2.6% compared to the previous year, which, if it continues, could negatively impact revenue growth.
  
• An increase in net financial costs due to higher debt levels and interest rates, which might pressure net margins or earnings.
  
• A decrease in adjusted net earnings by 1%, indicating potential challenges in meeting profitability targets.
  
• Higher capital expenditures due to supply chain projects and store expansions, which could impact cash flow and financial flexibility.
  
• Intense competition in the food and pharmacy sectors, requiring continued investment in marketing and pricing strategies, potentially affecting future revenues and net margins.

Valuation

• The analysts have a consensus price target of CA$91.64 for Metro 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$98.0, and the most bearish reporting a price target of just CA$71.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$23.2 billion, earnings will come to CA$1.1 billion, and it would be trading on a PE ratio of 19.7x, assuming you use a discount rate of 5.6%.
• Given the current share price of CA$90.89, the analyst's price target of CA$91.64 is 0.8% 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.