It’s been off to the races for the top Canadian grocers so far this year. Despite the 7% correction in shares suffered back in May, shares of L are up an impressive 16.3% year-to-date. With a below-average beta of 0.4, which means the name is less likely to follow the broad market, Loblaw (TSX:L) certainly appears to be the ultimate defensive growth play as the firm moves forward with its relatively low-risk multi-year expansion plan.
With another very strong first quarter in the books, as profits and revenues beating analyst expectations, the big question is how much higher the magnificent grocer can fly as it doubles down on some of its discount banners to save consumers extra cash as above-average levels of food inflation persist for a while longer.
Indeed, the Canadian retail scene faces some hurdles as firms look to readjust their supply chains and selection to avoid feeling the brunt of Trump’s tariffs. And while there’s no telling what tariffs will do to the economy in the second half, I do think that tighter budgets will keep on driving demand for high-value options. Indeed, I’d brace for increased demand for off-brand generics (think No Name) over at the local No Frills or Superstore and less demand for upscale organic supermarkets in the big city.
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Another strong quarter
With same-store sales growth (SSSG) numbers going strong and plenty of tailwinds working in favour of the red-hot grocer, I’d look for shares of L to finish the next year higher, perhaps north of the $250 per-share level as management continues to operate exceptionally well in a challenged retail climate. Hats off to management for another great quarter!
Indeed, the $10 billion five-year growth plan couldn’t have come at a better time. With a slew of cherished stores (think No Frills, Maxi, Shoppers, just to name a few), renowned for the value they provide, accounting for just over 60% of the new stores to be opened. Indeed, the slight tilt towards low-cost retail, I believe, is a formula for success as the “save money” mindset isn’t going anywhere, even as food inflation returns to a more acceptable (let’s say 2% or so) range. With the Bank of Canada still in rate-cutting mode, however, I’m not so sure food inflation will be so quick to fall below 1–2% anytime soon.
Discount grocery retail may be the place to be for the next few years
Just because inflation is on the retreat doesn’t mean the sky-high costs of fruits, veggies, and more will go down. In essence, the damage of inflation is already done. Slowing inflation will only limit the pace of further price hikes. As such, I think the rotation from high-end grocers to discount ones is a theme that will stick, not only for the remainder of 2025, but perhaps for the next five years and beyond. Value is what consumers want, and Loblaw has done a pretty good job of delivering.
As one of the more inflation-resilient big-name grocers in Canada, I’d not stand in the way of the firm as it embarks on an expansion journey that will probably take it to higher highs. It’s rare to come across such a high-quality defensive grower of this calibre. With shares trading at well over 30 times trailing price-to-earnings (P/E), though, I would watch closely for pullbacks.
Today, the stock is down over 5%, a “half correction” that could turn into a full-blown one as investors pare gains in some of their more defensive names. If the seasonal rotation out of defensives continues, I’d look to the $192–195 level as an opportunistic entry point.
