Barren Shelves and Panic Buying: Time to Invest in Grocery Retail?

Coronavirus has made grocery retail a promising investment. See my take on whether Loblaw Companies (TSX:L) or Metro, Inc. (TSX:MRU) come out on top.

| More on:
Supermarket aisle with empty green shopping cart

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Photos of empty store shelves are circulating in the media amid the panic buying of key household essentials. Canadians everywhere looking for safe, defensive equities to invest in have flocked to grocery retail. They see this as an oasis in a rather barren economic landscape.

In this article, I’m going to compare and contrast two of Canada’s largest retailers: Loblaw Companies (TSX:L) and Metro, Inc. (TSX:MRU). I will also discuss why I believe Metro may actually outperform its peers over the next 10 years.

Margins are key

From a long-term perspective, the grocery retail business is categorized by razor-thin operating and net margins. Just-in-time inventory standards and lean methodologies are key drivers for earnings growth over time. These inventory management techniques are industry standard and are the key driver of empty shelves of late.

Low margins have generally been the key long-term driver preventing me from investing in any grocery retailer. In general, Metro’s margins have tended to outperform those of Loblaw’s historically in the grocery space.

Loblaw has piled on debt in the past to support growth (and, by extension, price wars). However, Metro has generally stayed more regional and retained an ability to keep margins at manageable, long-term levels.

Fundamentally, I believe Metro will continue to outperform Loblaw over the next 10 years from a risk-adjusted return perspective. Operating metrics are everything. On that front, Metro is the better pick for conservative, long-term investors in my book.

Pharmacy same-store sales a near-term driver

While much of the emphasis has been on the grocery business underpinning the likes of Metro and Loblaw, perhaps an even more important business for those two companies is their respective pharmacy subsidiaries. Loblaw owns Shoppers Drug Mart and Metro owns Jean Coutu.

With a vaccine hopefully on the horizon in a few months’ time, all eyes will be on the numbers reported by both of these firms’ pharmacy chains. Analysts and investors alike will be following the trend closely.

I tend to prefer Jean Coutu over Shoppers from a numbers/fundamentals standpoint. In nearly every metric, Metro is likely to see better dollar per square foot and same store sales numbers than Loblaw in the pharmacy space in the near term.

Bottom line

In my view, Metro has the better balance sheet and income statement relative to its competition. I would therefore encourage investors focused on fundamentals to consider Metro for a defensive holding through these tumultuous times.

Stay Foolish, my friends.

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 Chris MacDonald does not have ownership in any stocks mentioned in this article.

More on Investing

Man holding magnifying glass over a document
Investing

3 Heavily Shorted TSX Stocks to Watch This Summer

Canadians should monitor heavily shorted TSX stocks like Canada Goose Holdings Inc. (TSX:GOOS)(NYSE:GOOS) in this bear market.

Read more »

Airport and plane
Investing

3 TSX Stocks Set to Take Off With Summer Travel

Canadians should direct their attention to the travel industry and snatch up TSX stocks like Air Canada (TSX:AC) and others…

Read more »

Investing

Young Investors: 3 Canadian Stocks You Can Trust as Inflation Rises

Inflation has soared to new heights, which should spur young investors to snatch up Canadian stocks like Empire Company Ltd.…

Read more »

analyze data
Cryptocurrency

2 Tech Stocks That Benefit From the Decline of Crypto

Crypto's bear market creates opportunities for traditional rivals like Lightspeed (TSX:LSPD)(NYSE:LSPD).

Read more »

Growing plant shoots on coins
Investing

Why This Canadian Growth Stock Could Double Next Thursday

This growth stock is set to soar if market recovery continues and what analysts expect from the company continues.

Read more »

Glass piggy bank
Investing

Market Correction: Boost Your Retirement Fund With These 2 Stocks

The correction in top TSX stocks presents a solid opportunity for investors with long-term financial goals to buy shares of…

Read more »

Happy family father of mother and child daughter launch a kite on nature at sunset
Dividend Stocks

Parents: Here’s Every Credit and Benefit You Can Claim From the CRA

Parents have it hard already, so make sure the CRA is doing everything for you by dishing out payments you're…

Read more »

edit Colleagues chat over ketchup chips
Dividend Stocks

3 Canadian Dividend Stocks to Buy and Hold for Life

These dividend-paying stocks have solid earnings base to support their payouts for decades.

Read more »