Loblaw Stock: Could Boycotts Take a Bite Out of Earnings?

Loblaw (TSX:L) stock’s next quarter may face some unforeseen boycott headwinds.

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Editor’s note: An earlier version of this article referred to Galen Weston as Loblaw’s “top boss,” implying he is the CEO. He is actually the chairman.

Various fed-up Canadian consumers seem to have had it with Loblaw (TSX:L). Indeed, a Reddit (NYSE:RDDT)-organized boycott is apparently on for May.

The subreddit r/loblawisoutofcontrol has gained considerable traction, with over 75,000 members subscribed to the channel. That’s a lot of Canadians, many of whom may be inclined to participate in a boycott that encompasses all Loblaw-owned stores, from Shoppers Drug Mart to No Frills, Real Canadian Superstores to Loblaw CityMarkets, and everything in between.

Higher prices amid inflation haven’t been unique to Loblaw-owned stores. That said, the firm seems to have made some moves that have rattled Canadian shoppers, some of whom have been showing all on Reddit that they’ve canceled their President’s Choice credit cards in protest of its business decisions.

Reddit’s r/loblawisoutofcontrol: A potential quarterly headwind?

Apart from price increases, the lowering of discounts on soon-to-expire goods, and reportedly excessive security at some locations, the surging price of Loblaw stock may have made most consumers upset at the firm and its chairman, Galen Weston. Indeed, Mr. Weston seems to have been the target of quite a bit of frustration on r/loblawisoutofcontrol and other places.

At the time of writing, shares of L are close to an all-time high at just shy of $155 per share. Over the past five years, shares have more than doubled, rising around 127%. Year to date, L stock is up more than 20%. That’s some serious performance which has made Loblaw shareholders happy, perhaps at the expense of some of its most loyal consumers over at r/loblawisoutofcontrol. For them, Loblaw’s surging stock is less welcome.

Though only time will tell if the May boycott carries into June, I think the company needs to act before a potential hit to quarterly earnings makes investors nervous.

Could the boycott hit the coming earnings?

I have no idea what the impact of the boycott will be. Regardless, it appears that Loblaw is taking steps to draw consumers back to its stores. With intriguing door-crasher items (think $1.50 for a box of Cheez-Its) over the local Shoppers Drug Mart, the company seems to have already begun to focus more on improving its value proposition.

As the perception of value improves, I suspect consumers will return, perhaps in droves.

For now, though, it’s my opinion that the May boycott remains a risk factor that investors should think through carefully before picking up shares at all-time highs. Sure, Loblaw recently clocked in an incredible 9.8% pop in quarterly profit alongside a generous 15% dividend raise. However, until Loblaw can make things right with some of its disgruntled customers, a haze of uncertainty remains.

I think any boycott-related impact is already baked in. I think Loblaw can make customers happy again without disappointing investors. It’s a careful balance, but one that’s more than obtainable. As such, L stock seems worth watching and buying on any potential bumps in the road.

The bottom line

At 23.1 times trailing price-to-earnings, L stock is not expensive. And with a solid private-label brand in No Name that could be the focus of a potential value push, I certainly would not bet against L stock. At the end of the day, there’s a Loblaw in close proximity to many Canadians. Oftentimes, it’s far too inconvenient to drive a few miles further to get a marginally better deal.

Come the next quarter, I’d be very surprised if boycotts weighed heavily on earnings. By then, I expect Mr. Weston will have already taken steps to win back the business and trust of its most disgruntled customers. After all, Mr. Weston needs to keep its customers happy and well-fed with good deals if it’s going to expand into new product and service categories (like No Name Mobile).

For now, the only question is how many deals and commitments will it take to lift the boycott and win back the trust of posters on r/loblawisoutofcontrol?

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 Joey Frenette has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy

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