New Discount Stores And Modernized Pharmacies Will Improve Consumer Experience

Key Takeaways

• E-commerce growth and the Moi program are poised to boost future revenue through increased sales and customer engagement.
  
• Supply chain modernization and new store expansion aim to enhance margins and profitability, supported by tax benefits and operational improvements.
  
• Rising costs and elevated promotions may pressure margins, affect profitability, and challenge expansion plans amid currency and inflation risks.

Catalysts

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

• The growth of online sales by 18% for the quarter, driven by partnerships for same-day delivery and click-and-collect services, indicates a potential increase in future revenue streams as e-commerce becomes a more significant portion of sales.
  
• The introduction of the Moi loyalty rewards program in Ontario and other regions is expected to increase customer engagement, traffic, and overall sales, potentially impacting revenue positively.
  
• The completion and commissioning of new automated distribution centers, leading to a significant tax holiday benefit of $66 million over three years, is expected to improve net margins and contribute to earnings growth.
  
• The expansion plans which include opening a dozen new stores, mostly discount locations, and the modernization of existing stores and pharmacies are expected to increase revenue through broader market reach and upgraded consumer experience.
  
• The completion of significant investments in supply chain modernization is expected to lead to efficiency gains and operational improvements, ultimately enhancing net margins and supporting future profitability growth in line with their EPS growth target.

Metro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Metro's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 4.7% in 3 years time.
• Analysts expect earnings to reach CA$1.1 billion (and earnings per share of CA$5.46) by about January 2028, up from CA$960.6 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 19.9x on those 2028 earnings, down from 20.4x today. This future PE is greater than the current PE for the CA Consumer Retailing industry at 19.4x.
• Analysts expect the number of shares outstanding to decline by 3.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.67%, as per the Simply Wall St company report.

Metro Future Earnings Per Share Growth

Risks

• The weakening Canadian dollar presents a risk, particularly when sourcing products from the U.S. or priced in U.S. dollars, which could lead to increased costs and pressure on gross margins.
  
• Increasing construction and labor costs may impact future store expansion and renovation projects, potentially affecting CapEx returns and net margins.
  
• The company's operating expenses increased due to the launch of new programs and professional fees; if these expenditures do not provide proportional revenue growth, this could pressure net earnings.
  
• Inflationary pressures on certain commodity prices may continue to impact cost structures, affecting operational efficiencies and net margins.
  
• The company noted elevated promotional penetration, which, if sustained, might compress margins if not offset by higher sales volumes, impacting overall profitability.

Valuation

• The analysts have a consensus price target of CA$92.27 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$99.0, 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 2028, revenues will be CA$23.5 billion, earnings will come to CA$1.1 billion, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 5.7%.
  
• Given the current share price of CA$88.56, the analyst's price target of CA$92.27 is 4.0% 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.