A shakeup in Canada’s retail industry is happening, as predicted last year. The retail space is getting smaller by the minute as more “retail immigrants” set up shops in the country. With the pie shrinking, are consumer staples or grocer stocks like Loblaw Companies (TSX:L) worth buying today?
This major Canadian retailer isn’t perturbed and investors should feel the same way. The starting price of $65.92 to begin the second quarter shows the continuing gallant performance of the stock from 2018. Unlike most stocks that suffered sharp drops during the Q4 2018 market selloff, Loblaw managed to stay afloat and bucked the trend.
Established food and pharmacy leader
Loblaw is no pushover amidst the heightening competition — notably, the onslaught of Amazon.com. The company delivered a $221 million profit in the fourth quarter with revenue rising to $11.22 billion. The figures couldn’t have been better, if not for the restructuring last year and the one-time charges levied on the company.
The better-than-expected quarterly profit was achieved, even if the financial services declined. Canadian shoppers’ preference for Loblaw’s food and drug stores is very much evident. The retail segment grew 2.6% to $3.25 billion, while the retail same-store sales in the food and drug segment rose 1.7%.
In totality, Canada’s largest retailer is a force to reckon with. The tentacles of the nation’s food and pharmacy leader are all over the place to make shopping easier for customers. The company is in the thick of the fight in home delivery services because of the partnership with online grocery chain Instacart from San Francisco.
Divided business outlook
Industry analysts are divided on whether Loblaw is a good investment prospect. With the threats of recession and during one, some investors veer away from cyclical stocks. They shift to consumer staples stocks like Loblaw for safety and defence. Loblaw’s show of resiliency in the Q4 2018 selloff proves that point.
Observers on the other side of the fence say the challenges in the retail milieu are overwhelming. There are fears the grocery sector will underperform for several reasons. The first is the market disruption, which is caused by competition, inflation, and e-commerce pressures.
Because of the heavy competition, Loblaw would have to engage in deep price discounting, which would lead to paper-thin margins. The expected minimum wage hikes will bloat the expense side, too. Finally, Loblaw isn’t as attractive as a safety stock if the dividend yield is below 2%.
The reasonable choice
Given the pros and cons, Loblaw can still beat the odds moving forward. Since the company has the click-and-collect e-shopping service, the vulnerability in online shopping is somewhat mitigated. Analysts with positive sentiments project a 10-25% price appreciation.
Among all Canadian grocers, it is Loblaw that can potentially hit double-digit growth when all costs, including absorbing minimum wage hikes, have been considered. Being an experienced operator in both grocery retailing and pharmacy, Loblaw has plenty of wiggle room to grow.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Christopher Liew has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. The Motley Fool owns shares of Amazon.