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Loblaw/Weston: Stocks on a Tear

From a financial standpoint, the last six months or so have been pretty kind to Galen Weston, the Chairman and 63% owner (Source:  Capital IQ) of George Weston Limited (TSX:WN).  The Weston’s brand is plastered all over the bakery section of most grocery stores, however, it’s the companies 63% stake (Source:  Capital IQ) in Loblaw (TSX:L), Canada’s biggest grocer, that truly drives the company’s results.  And, it is this ownership stake in Loblaw that’s driven Mr. Weston’s net worth significantly higher in recent times.

Since Loblaw announced that it would be spinning the bulk of its real-estate assets into a REIT back in November, the stock has appreciated by 39%.  Although the REIT news drove the initial gain, recently released, better than expected quarterly results as well as 2 dividend hikes have helped drive the stock higher as well.

This performance out of Loblaw has resulted in Weston shares climbing by 31% over this same period.  This translates into a gain of more than $1.57 billion for Mr. Weston’s stake and brings the value of his Weston shares to a level just below $6.7 billion.  Meh.

Has the tide turned?

Loblaw has been in purgatory for a number of years as it has tried to maintain its market dominance by engaging competitors (both new and old) head on.

To offset the top line pressures brought on by battling the competition, the company has tried to carve out costs from the business to at least maintain profitability.  Loblaw has been in the process of “fixing” its inventory management and IT systems for what seems like forever.

There is finally evidence that the path has cleared on this massive undertaking.  The company’s EBIT margin in the most recent quarter of 4.2% was the best it’s been since the 4th quarter of 2011 and exceeded the average of 3.9% since the first quarter of 2007.  Though 0.3% may not sound like much, when annual revenues are nearly $32 billion, this translates to an extra $96 million in operating profit.

IT related spending is expected to peak in 2013 and as it shrinks, further margin improvement should occur.  If revenues hold, this bodes well for Loblaw’s profitability and cash flows.

Foolish Takeaway

Though Loblaw finally appears to be gaining traction on the changes it’s been trying to implement for years, the road ahead is filled with challenges.  Competition isn’t going away, in fact, it’s intensifying and this means continued innovation is critical for Loblaw to maintain its current market position.  The recently introduced PC Plus loyalty program (which I have a card for staring back at me right this moment) is a further step in the right direction.  However, the innovation treadmill is not usually representative of an overly strong competitive position and therefore, at some point down the line Mr. Weston may look back on this period as a wise time to have locked in some of his new-found wealth.

With its recent dividend hikes, Loblaw is getting back into the good books of Canadian income investors.  If you count yourself as a member of this crowd, you need to click here to receive our special FREE report “13 High-Yielding Stocks to Buy Today”.  This report will have you rolling in dividend cheques before you know it!

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Fool contributor Iain Butler does not own shares of any of the company’s mentioned at this time.  The Motley Fool has no positions in the stocks mentioned above.

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