The competition between Canada’s grocers has heated up in recent years, with the grocers slashing prices to attract consumers and offering sales so frequently that they have at times hurt their own bottom lines.
Loblaw Companies Limited (TSX: L) recently acquired Shoppers Drug Mart for some diversification and to better compete with the likes of Target and Wal-Mart Stores Inc., relative newcomers to Canada’s grocery scene. So has this strategy been a success? Let’s compare the company with Metro Inc. (TSX: MRU) to see which is a better addition to your portfolio.
Loblaw Companies Limited
Loblaw Companies, majority-owned by George Weston Ltd. (TSX: WN), is Canada’s largest grocer. The company now also holds fairly significant pharmacy assets after acquiring Shoppers Drug Mart.
Over the past 10 years, the company’s stock has declined by 11%. Loblaw Companies’ annual dividend yield is 1.64%. This is a fairly disappointing long-term performance, but over the past 52 weeks, the company’s stock has appreciated about 35%.
Loblaw’s latest earnings were positive overall, with the company reporting a better-than-expected quarterly profit thanks to increased sales at the recently acquired Shoppers Drug Mart business. Loblaw’s revenue increased 36%, to $13.6 billion, a quarter of which was from Shoppers Drug Mart. Net earnings fell to $142 million from $150 million. Adjusted basic net earnings were $0.90 per share, topping the Thomson Reuters compiled estimate of $0.87 per share.
Like Loblaw Companies, Metro Inc. has grocery store and pharmacy assets. But Metro Inc. is significantly smaller; the company has a $6.74 billion market cap compared to Loblaw’s $24.64 billion.
In addition to being a smaller-sized company, Metro’s stores are also concentrated in Ontario and Quebec. The company is quite proud of its geographic concentration. In fact, one of the first things you read on Metro’s corporate website is, “The only major Canadian food distribution company to have its head office in Quebec.” Perhaps the company is trying to use the good east coast vs. west coast rivalry to encourage shoppers in Ontario and Quebec to buy their groceries at Metro’s stores.
There is a huge discrepancy when you compare Metro Inc.’s prior 10-year stock return to Loblaw’s. Over that time period, Metro’s stock has appreciated by about 300% to Loblaw Companies’ negative 11% return. Recently, things have been more on par. Over the last 52-week period, Metro’s stock has appreciated by 29%. The annual dividend yield is also comparable, at 1.50%.
Who comes out ahead?
So which grocer is a better investment? Both companies are performing about the same this year, but historically, Metro has been the clear winner. That being said, Loblaw Companies is just starting to see the benefits of its acquisition of Shoppers Drug Mart, so is that diversity a better reason to buy?
My choice is Loblaw Companies. I think Metro Inc.’s geographic focus will become a problem over the long haul. Ontario and Quebec are Canada’s most populous provinces, but there is a good deal of business out west that the company is missing out on. Canada is a large and diverse country, but recently, most of the economic growth has been centered in Western Canada, thanks to copper, natural gas, oil, etc.
The region’s rich resources have attracted many corporate headquarters to the provinces of British Columbia and Alberta. The economies on Canada’s opposite coasts are actually quite different, and by having exposure to both, Loblaw can survive under more varied economic climates.
Another positive for Loblaw Companies is that it is a large company that has shown the ability to successfully purchase and integrate other businesses under its banner of offerings, a great way for the company to continue expanding its reach and taking market share away from Metro Inc.
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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 Leia Klingel has no position in any stocks mentioned.