Loblaw Companies Ltd (L.TO)

This has been a little bit disappointing. He had thought they had turned things around two quarters ago, but things continue to be a bit weak. Being one of the premier names in the grocery space in Canada, the future should be strong, but they are having challenges.

(Market Call Minute) So competitive and it is murder in that retail business.

(Market Call Minute.) If you own, watch to see how they integrate their Shopper’s acquisitions.

Stock rallied when they IPO’d the REIT portion of where their stores are and when they announced the Shoppers acquisition. However, when they reported their weak quarter the stock pulled back. Shoppers deal should be positive for them as pharmacy should be more attractive than food. Longer-term, this should help their earnings growth profile. Management hasn’t had a good track record of integrating so this will have to be watched. In this space, this is the one that looks most promising and she is going to have another look at it.

Thinks most of the shoppers deal is priced in. The industry itself is getting squeezed. It’s a difficult environment. Prefers Empire.

Thinks Shoppers deal will go through. The difficulty for Loblaw’s is the margins on the grocery side. Don’t enter it until you see how Shoppers integrates.

Last quarter’s earnings were extremely disappointing however, same-store sales were higher than the competition along with EBITDA. The whole sector has some really serious problems. With their acquisition of Shoppers, the enterprise value is now only 31% food. If you look at the sum of the parts, the stock is worth a lot more than $42.

Feels the supermarket space in Canada is a disaster. Last quarter’s earnings were a disaster. Have been trying very hard to turn the ship around. However, same-store sales were up a little bit. EBITDA was up a little and outperformed their peers. With their acquisition of Shoppers (SC-T), they’re only about 31% food now so it is a completely different company. The sum of the parts is up around $52-$53. Doesn’t like the sector at all, but there is some merit to this company right here.

(Market call minute.) Wouldn’t be buying this one. Doesn’t think there is enough growth. They are going to have issues digesting their Shoppers acquisition.

Doesn’t like supermarkets right now. They sell mostly food and demand will grow with population but there are all these new entrants (Wal-Mart, Target). The square footage for food sales is going up quicker than population so the only thing to give would be margins. They are the biggest and most exposed to the grocery business and yet they aren’t that good at it. They also tried updating their logistics and it was a disaster until recently.

Chart shows support at around $41 and $44. If it holds at the current level, he would be a buyer but you have to accept that you might end up going down to the next level of $41.

Thinks there is more to go. Lately they have been able to consolidate their entire internal data base and put an SAP in. Right now.they are sort of doing double duty, so have lots of labour hours and lots of technology hours. The SAP is going to take out a lot of the labour costs. We will see margins expand on this probably 200- 300 basis points over the next 1.5 years. They can turn Shoppers into a very light format store so that they can get into smaller towns.

Cream of the crop. Has been in transition for the last few years. But this is the one to die. Likes it here.

On the sidelines with this sector because he feels the space is very crowded and there is going to be a lot of competition and will be very difficult to grow the top line and margin. Their purchase of Shoppers creates an interesting dynamic in that they are going to rely on big synergies from this and are going to have a lot of upside. His analysis is that it is not going to be that great in the near-term. There are a lot of integration risks.

Can see 20%-25% upside in the stock. Shoppers acquisition has a lot of potential for them to realize synergies and increase their operating profit. $55-$60 in 12 months. (See Top Picks.)