George Weston Earnings: Consumers Stock Up Their Baskets With Value Items at Loblaw; Shares Cheap

After digesting no-moat George Weston’s WN fiscal 2023 second-quarter results with little to unpack—as Loblaw’s results (99% of sales) were announced last week—we don’t plan a material change to our CAD 179 fair value estimate beyond time value. With shares sliding nearly 15% since its first-quarter earnings (May 9)—which strikes us as curious, given Loblaw’s continued strength in both its retail and drug arms—we see opportunities for investors to stock up on this name. Despite the competitive landscape of the Canadian grocery space, we believe Loblaw’s robust private label and personalized loyalty benefits, along with the operator’s ongoing efforts to optimize its store network and distribution centers, should help it maintain its market-leading position. Thus, our long-term prospects for low-single-digit average top-line growth and mid-single-digit operating margins remain intact.

In the quarter, revenue increased 7% to CAD 13.9 billion, with Loblaw and Choice Properties posting 6.9% and 5.4% top-line growth, respectively. Loblaw’s food and drug arms continued to show strength (with same-store sales growth of 6.1% and 5.7%, respectively), which we attribute to the firm’s established position in private label, e-commerce channel (sales up 13.9%), and its loyalty program that facilitates repeat purchases and aids customer retention. Even so, inflation’s onslaught (internal food inflation of 9.1%) and Loblaw’s inability to pass along higher vendor pricing to its customers (which underpins our no-moat rating), along with higher shrink in its stores, pressured Loblaw’s gross margin by 30 basis points to 31.1%. Shifting focus to Choice Properties, we continue to view its necessity-based tenant profile as an attractive source of stable cash flow, although we plan to keep our eyes on the developments of several industrial and residential projects underway. Still, the segment remains too small (1% of sales) to meaningfully affect the firm’s competitive positioning.