My grocery habits are predictable enough that the store could probably write my list for me. That’s an appealing thing to find in a business. It’s also why I wouldn’t pay extra for a stock just because I know exactly where the cereal aisle is.
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Get in on groceries
People can put off buying a couch. They rarely skip buying groceries for long. For a grocer’s shareholders, the distinction is whether customers come back more often or the average basket simply costs more.
I’d look at sales from stores that have been open long enough to compare with last year. That helps me see how the existing business is doing before giving credit for opening more locations. Then I’d check how much of the growth made it to earnings per share.
Store openings can help either chain grow, especially where there’s room for a discount banner. I’d watch how quickly new stores earn back the money spent opening them. A new location needs labour, inventory and rent from day one, and sales can take time to build.
The share price is the last piece. A reliable business can make a lousy purchase if you pay for years of growth upfront. That’s one reason I like putting two Canadian blue-chip stocks side by side before deciding.
Two different grocery runs
Loblaw Companies (TSX: L) operates discount and conventional grocery stores as well as Shoppers Drug Mart. A customer might use a discount banner for food, fill a prescription at Shoppers and earn points on both trips. That gives Loblaw multiple chances to keep the same customer coming back.
Loblaw’s second-quarter adjusted earnings were $0.66 per share, up 11.9%. It’s worth seeing whether that earnings growth holds after the sale of PC Financial changes the business being reported on. I’d give particular weight to store traffic and pharmacy performance as the comparison resets.
Empire Company (TSX: EMP.A) owns Sobeys, FreshCo and other food banners. Its fiscal first-quarter earnings rose to $1.04 per share from $0.91, while food same-store sales excluding fuel grew 1.2%. I like the earnings progress. For a long holding period, I’d want more evidence of strength on the shop floor, too.
Considerations
Loblaw closed at $69.45 recently and Empire at $49.39. Those prices are about 29 times Loblaw’s fiscal 2025 adjusted earnings of $2.43 per share and about 15 times Empire’s fiscal 2026 adjusted earnings of $3.24. The reporting periods differ, and Loblaw has since sold PC Financial. Even as a rough comparison, it tells me I’m paying quite a bit for Loblaw’s extra ways to grow.
My tie-breaker is where the next dollar of growth can come from. Loblaw can gain from more trips through discount stores and from pharmacy demand. Empire can make a strong case if improving stores brings more customers through the doors without giving back the gains in lower margins. I’d also watch how each grocer handles promotions. A good flyer can bring more shoppers through the door. I want evidence they’re coming back for the rest of the basket once the sale is over, because that’s where the investment in better prices can earn a return.
There’s a limit to what I’d pay for that broader business. Food is competitive, and better prices for shoppers can mean less profit for grocers if they can’t offset them with more volume or lower costs. I’d take a smaller position rather than fill the account with one of the stocks I plan to buy and hold just because the industry feels familiar.
Bottom line
I’d choose Loblaw for long-term growth and buy in stages. At that premium, I’d leave room to buy more once I’ve seen how the grocery and pharmacy business earns on its own. If Empire keeps bringing shoppers back, the cheaper stock could win my next dollar.
