Loblaw Companies Ltd (L.TO)

Not cheap. Already had a great run.

Loblaw’s is a great franchise. They are incredibly innovative, but you can walk into any store in the food industry and it is glamorous because they have caught up to Loblaw’s. Let’s see how they integrate Shoppers. There has been a lot of disinflation in the food industry. Prefers WN-T.

Canadian grocery segment is a pretty competitive area. It is a pennies and nickels business. He has always been concerned about the execution risks. They had a famously horrible time reorganizing their distribution warehousing and logistics and had stockouts in stores for years. They may have that under control now. Given that the stock has had a run up, he doesn’t feel compelled to own it.

Stock has done quite well. Liked their Shoppers acquisition. Drug retail is a higher margin business. Loblaw’s is coming off a very capital intensive period, which is largely behind them now. As that ramps down, there is going to be increasing cash flow. Also, the competitive environment in Ontario was quite intense last year, so square footage growth going forward, is going to moderate to the 2%-3% level. With a decline in energy prices, there is a thought that consumers will have a bit more money in their pockets, so they may spend a bit more at the grocer or drugstore. She has a target of around $65.

Loblaws (L-T) or Canadian Tire (CTC.A-T)? He likes retail. This is probably one of his biggest sector weights. He has more US exposure than Canadian. Thinks the best theme you can focus on is home improvement and Canadian Tire fits in there and would be the one that he would choose in a very short run.

It is going to be 2-4 years to see the synergies from the Shoppers acquisition. The combined company looks awfully good.

Has a lot of interesting parts to it. Has gone through a bit of transformation over the last 2 years in terms of reorganizing their supply, putting in SAP systems, etc. There has been some management turnover. Overall it is a lot more efficient than it was 5 years ago. Looking out a few years, you could see them earning around $3.75, a fairly significant multiple from a few years back. It may be a little ahead of itself if it were to go up very quickly from here.

Likes this one very much. Has now become a bit of a holding company. On an enterprise value basis about 38% of this company is groceries right now. They have Shoppers Drug Mart, Joe Fresh which is expanding into other stores and the real estate investment trust. Same-store sales were up about 2.5% when they came out with some really good gangbuster earnings. Thinks this is going up.

(Is there a good seasonal exit point for food retailers such as Empire (EMP.A-T) and Loblaws (L-T)?) Both have been good stocks for people and both are well-managed companies. This one is more expensive than Empire, but he prefers it in any case because of the Shoppers acquisition. This gives them a lot of room to drive synergies, both in revenue and costs.

Not a fan of the food grocery sector for a while. Canada is being overstored in groceries. But the market is favouring defensive stocks and these guys are a beneficiary. They finally have their systems together and are slowly gaining market share. He is not running out to buy it.

Had thought the deal with Shoppers was a clever one. It gave them cost synergies, but also revenue synergies. Really like the combined story. It started to do really well post the merger. Valuation started to rebound a little so it is not as good a Buy as it was. It is holding up well in the market that it is in. It’s a good story.

It is behaving very well in this correction and he would have no problem owning it.

Long Loblaw 4.86% Senior Unsecured Debentures due 2023, Short Government of Canada 1.5% of June 2023. The longer bond exposure is taken out by the short position. Loblaw’s is going to grow out their small stores in urban centers and they will be cross selling with Shoppers Drug Mart. They are a cash flow machine. They are committed to reducing leverage.(Stock price will not match as this is a bond.)

He would not buy it here. Buy if it pulled back to $53. Shoppers is planning to add a food component. It broadens the base for exposure to Loblaw’s products. He would like to see it pull back before buying it.

Consumer stocks, particularly staples, do well from about April all the way through to November. This is basically a defensive position. Chart shows this is showing higher highs and higher lows. Everything is favourable for this. Once you get to November, you probably want to look for something more aggressive.