Loblaw’s Enviable Private-Label Offerings Deliver for No-Moat George Weston; Shares Fairly Valued

Given that no-moat Loblaw consists of 99% of no-moat George Weston’s total revenue and has already announced its third-quarter results, there is limited novel information for investors to digest. Revenue improved 8.2% in the quarter, boosting the firm’s year-to-date revenue spike to 5% (CAD 43 billion) and slightly outpacing our 3.5% fiscal-year forecast (CAD 54.8 billion). We believe Loblaw’s suite of private-label offerings and focus on personalized promotions (PC Optimum) offered price-conscious consumers value in combating an 11% CPI spike in food purchased from stores during the quarter, lifting food retail same-store sales by 7%. Moreover, Loblaw’s drug retail segment benefited from heightened seasonal demand in the cold and cough (RSV, COVID-19, flu) and beauty aisle, as consumers have returned to in-person activities. In turn, the favorable mix contributed to a 10-basis-point benefit in adjusted EBITDA margin to 11.1%, bringing George Weston’s year-to-date margin to 11.6% (slightly ahead of our 11.1% 2022 projection). All in all, the firm was able to navigate heightened input costs in the quarter, and we surmise Loblaw should be able to continue to drive volume (net increase in the quarter) through its portfolio of discount banners and versatile pricing initiatives, such as price freezes on select private-label goods. We plan to bump our full-year sales and EBITDA outlook modestly to account for the recent outperformance, leading to a low-single-digit hike to our George Weston CAD 159 per share fair value estimate.