Loblaw Earnings: Sales and Profit Growth Normalizes as Food Price Inflation Cools; Shares Overvalued

The impact of easing food price inflation in Canada was evident in the second-quarter results of no-moat Loblaw. Sales growth slowed to 1.5% with flattish same-store food sales, and adjusted net profits rose 6% on cost control. Loblaw has made prudent investments in discount banners, private label, and its loyalty program. However, the results reaffirm our view that the lack of brand intangibles in commodified food retail makes it difficult for Loblaw to maintain mid-single-digit sales growth in the past two years as food price inflation normalizes. We expect our 2024 estimates of sales and adjusted earnings per share to grow 3.6% and 9.5%, respectively, and our 10-year forecasts for 3% annual sales growth and operating margins averaging 5.2% to be unchanged. We plan to maintain our CAD 129 fair value estimate and view shares as overvalued.