Have the “Grocery Wars” Gotten the Best of Metro?

Canada’s third largest grocer reports second quarter results.

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The Motley Fool

This is an ominous time for Quebec-based Metro Inc (TSX: MRU). Competition in the Canadian grocery industry is as intense as ever, spurned last year by Target’s entry into Canada, and Walmart’s continued expansion.

Rivals such as Loblaw (TSX: L) and Empire (TSX: EMP.A) have both made major acquisitions in the past year, leaving Metro in a distant third in the industry. With price competition heating up, the company must feel like it is swimming with sharks by now.

At least this is what the newspapers are saying. But Metro is doing everything it can to prove it can thrive.

Not a bad quarter

Metro posted decent numbers in the second quarter. Sales grew 1.7% year-over-year, 1.0% on a same-store basis, and the company’s gross margins held steady. While such growth would be very underwhelming for most companies, these numbers were enough to beat analyst expectations.

Metro also raised its quarterly dividend by 20%, to 30 cents. In response, the stock rose by as much as 3.2% on Wednesday.

Still a safe bet

While the headlines constantly use phrases like “grocery wars”, the reality is that competition is not as fierce as it is in other industries. The Canadian grocery segment is still dominated by three large grocers, and their access to the best real estate has made it difficult for the American challengers to break through. And while there’s practically no growth left in Canadian food retailing, it is not going to suffer during a bad economy.

Metro’s results reflect these realities. The company has earned a return on equity of at least 14% every year for the last 20 years. And over the same time period, Metro has raised its dividend every year (the shares currently yield about 1.8% after the latest increase). Investors looking for a safe place to park their money should still consider adding this company to their portfolio.

Foolish bottom line

The most recent quarter shows that few companies in Canada can be counted on like Metro. Despite growth numbers that appear weak at first, the company just keeps rolling along — no matter what the “grocery wars” headlines say.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

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