Metro Earnings: Prudent Investments and Agile Execution Support Growth and Profitability

We don’t plan any material change to our CAD 66 fair value estimate for no-moat Metro MRU after digesting its second-quarter results. With shares trading 15% above our intrinsic valuation, we suggest investors await a more compelling risk/reward.

Sales advanced 6.6% (to CAD 4.6 billion) in the quarter, aided by 5.8% and 7.3% same-store sales growth in the food (75% of sales) and pharmacy (25%) arms, respectively. And although inflation (9% uptick in internal food basket and mid-single-digit rate in pharmacy) started to moderate on a sequential basis, it continues to buoy the firm’s top line, as tonnage remained flat. Metro’s gross margin held up at 20.1% (flat year over year) thanks to its ongoing supply chain modernization projects and resulting productivity gains, despite the firm’s efforts to maintain competitive prices for its value-oriented consumers. We see the firm further unlocking efficiencies through such initiatives, supporting our 7.5% operating margins longer term (from 7.1% in fiscal 2022).

Encouragingly, Metro unveiled its plan to roll out a new loyalty program (in the late spring) aimed at providing consumers with more opportunities to collect/redeem points and benefit from targeted promotions both online and in-store, which we view as a prudent way to better engage its consumers. In addition, Metro’s investments in omnichannel offerings (through expanded click-and-collect offerings and partnerships with third-party vendors) resulted in a 41% growth in online sales in the quarter. Taken together, we think these efforts should help the firm maintain its competitive position and better capitalize its 95% household penetration in Quebec (which houses about 75% of its owned and franchised food and drug outlets), supporting our low-single-digit average sales growth longer term. Nonetheless, we maintain a cautious view on the digital channel’s viability in Canada due to the nation’s lower population density and online grocery penetration.