George Weston Earnings: Loblaw’s Private Label and Drug Strength Boost Performance Despite Inflation

No-moat George Weston’s WN first-quarter marks trickled in with few surprises, given 99% of its revenue is derived from no-moat Loblaw (reported May 3). We don’t plan a material change to Weston’s CAD 174 fair value estimate and view shares as appropriately valued.

Unpacking the performance, no-moat Loblaw’s sales popped 6%, slightly ahead of our 4% full-year estimate, as food and drug retail same-store sales improved 3.1% and 7.4%, respectively. Leading the charge, front-store drug sales recovered from omicron-induced lockdown in the year-ago period, while momentum across the firm’s health-related service offerings grew. In food, Loblaw’s dynamic private-label assortment is increasingly resonating with cash-strapped consumers. In fact, higher-margin private-label brands President Choice and No Name posted double-digit sales growth, outpacing national brand growth 2 to1. Given this strength, gross margin improved 20 basis points to 31.3%, despite management’s comments about the firm’s inability to pass through the full impact of 10.5% food inflation through price increases in the quarter. And while these profit gains extended to George Weston’s EBITDA line (with margins flat at 11.5% versus our 10.1% full-year estimate), we continue to believe that selling, general, and administrative expenses will outpace Loblaw’s sales growth.

All in all, management maintained its fiscal 2023 outlook calling for flat gross margins and low-double-digit EPS growth at Loblaw, in line our preprint 32% gross margin and 12% EPS growth. We suspect Loblaw is well equipped to maintain customers through its private-label offerings and discount banners. Additionally, Loblaw plans to open over 70 points of primary care, providing aid to an overwhelmed Canadian health network. We surmise the firm’s pharmacist-led healthcare ventures will help drive trips and further embed consumers into the firm’s ecosystem.