Loblaw Companies Limited
On the menu: Q2 reinforces our call on Loblaw as best positioned in the grocery space, PT to $154
Our view: Strong and better than expected Q2 results underscore favourable momentum shift internally, and Loblaw's strong positioning against the backdrop of accelerating inflation. Results and outlook supportive of our constructive view and relative ranking with Loblaw our top pick in the grocery space. Raising target multiples to reflect tangible progress and improvements in key drivers of valuation: ROIC, FCF and EBITDA growth, underpinned by the Company's unique collection of inter- related assets. Target +16% to $154 (Ex. 1).
Key points:
Loblaw well-positioned for inflationary environment. Management tone on the conference call was highly constructive around all aspects of the business, including historical financial performance across inflationary cycles. Inflation continues to drive penetration of both discount (~60% of footprint) and private label (~35% penetration) where Loblaw over- indexes relative to peers. Company is actively reviewing and converting store formats from Market to Discount where appropriate, with positive sales and earnings contribution of converted locations. While general merchandise ex-apparel was a drag on comps, inventory position is healthy.
High margin categories, expanding scope of services lead growth in pharmacy. Outlook strong, underpinned by normalizing demand for high margin front store categories (notably cosmetics), Rx count recovery, expansion of services and COVID symptom management.
Bias to the upside on consensus view. 2022 EPS guidance revised upward from "low-double-digit" to "mid-to-high teens". Consensus EPS $6.41 going into the quarter +15% Y/Y suggesting moderate upside post Q2 release and as H2 unfolds. Our 2022E EPS $6.63 (up from $6.45) implies 19% growth.
Positioned to return >$1.5B annually to shareholders. We incorporate $1B buyback in 2022, rising to $1.25B annually thereafter. Dividend $530 MM.
Raising target multiples consistent with prior upside scenario as thesis plays out, target +16% to $154. At 8.6x C23E EBITDA, L still trades at a 2x discount to MRU (Ex. 5). With demonstrated performance in food retail and with the tailwind of normalizing trends in pharmacy augmented by internal initiatives and opportunities around expansion of services both in-pharmacy and through related businesses (Lifemark, PC Health), the valuation gap to MRU should continue to narrow. We are raising our target multiples from 17x/9x EPS/EBITDA to 19x/10x respectively, bringing our target EBITDA multiple closer to that of MRU 10.5x. We reiterate that multiples should converge over time underpinned by what we view as greater torque on Loblaw financial performance. Refer to RBC Imagine: Reimagining the weekly shop for a broader discussion on shifting consumer behaviour to combat food price inflation.