Supply Chain Modernization And Moi Rewards Program Will Improve Customer Loyalty

Key Takeaways

• Diversification through new stores, reward programs, and supply chain improvements is expected to drive revenue and enhance customer loyalty despite rising costs.
  
• Emphasis on operational efficiency and e-commerce growth positions Metro to meet its earnings growth targets, aided by strategic tax advantages.
  
• Intense competition, cost pressures from tariffs and promotions, and increasing expenses threaten Metro's margins and market share in the evolving retail landscape.

Catalysts

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

• The commissioning of Metro's new automated distribution center for fresh and frozen products in Terrebonne is anticipated to enhance operational efficiencies and potentially reduce costs, positively impacting net margins and earnings over the next three years due to a provincial tax holiday of approximately $66 million.
  
• The launch of the Moi Rewards program across multiple provinces aims to increase customer loyalty and basket size, driving growth in both customer engagement and revenue.
  
• Metro's strategic expansion plans, including opening a dozen new stores and major renovation projects for both food and pharmacy segments, are expected to contribute to revenue growth over the medium and long term, despite the challenges posed by higher construction costs.
  
• Growth in Metro's online sales by 18% reflects increased consumer adoption of e-commerce platforms, supported by partnerships for same-day delivery and click-and-collect services, potentially leading to higher revenues.
  
• Metro's focus on modernizing its supply chain and optimizing operational efficiencies post-investments positions it well to achieve its annual EPS growth target of 8% to 10%, bolstering future earnings.

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 5.5% in 3 years time.
• Analysts expect earnings to reach CA$1.3 billion (and earnings per share of CA$5.6) by about March 2028, up from CA$960.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.9x on those 2028 earnings, down from 21.3x today. This future PE is lower than the current PE for the CA Consumer Retailing industry at 22.0x.
• Analysts expect the number of shares outstanding to decline by 1.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.86%, as per the Simply Wall St company report.

Metro Future Earnings Per Share Growth

Risks

• The weakening Canadian dollar and potential tariffs on U.S. imports present significant risks to cost management, which could put pressure on Metro's gross margins if they are unable to pass increased costs onto consumers.
  
• Elevated promotional penetration and continued pressure to deliver discounts can compress profit margins, limiting Metro’s ability to improve net earnings despite sales growth.
  
• Increased operating expenses due to marketing and professional fees, such as those incurred for the launch of the Moi program and tax resolution, could negatively impact net margins if not balanced by proportional revenue growth.
  
• Competition in the food retail sector remains intense, with other market players expanding aggressively, particularly in discount formats; this might influence Metro's revenue growth and market share gains.
  
• Rising construction costs could affect the returns on Metro’s capital expenditure projects, potentially impacting the company's financial health and long-term earnings growth targets.

Valuation

• The analysts have a consensus price target of CA$93.182 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$100.0, and the most bearish reporting a price target of just CA$73.0.
  
• 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$1.3 billion, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of CA$92.71, the analyst price target of CA$93.18 is 0.5% 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.