Key Morningstar Metrics for Loblaw
- : C$43.00Fair Value Estimate
- : ★Morningstar Rating
- : NoneMorningstar Economic Moat Rating
- : LowMorningstar Uncertainty Rating
What We Thought of Loblaw’s Earnings
Loblaw’s L first-quarter revenue increased 4.2% from last year to USD 14.4 billion, with food retail sales increasing 3.9% and drug retail sales increasing 4.8%. Adjusted EBITDA margin expanded 20 basis points to 11.1%, driven by increased operating leverage, partially offset by distribution center buildouts.
Why it matters: Loblaw’s value focus, underpinned by private-label offerings, hard discounting, and loyalty program promotions, has resonated well with consumers despite macroeconomic uncertainty. These efforts led to same-store sales growth of 2.4% for food and 4.1% for drug.
- In food retail, traffic and basket size grew on a same-store basis. But with internal food inflation trailing Canada’s grocery consumer price index of 4.4%, these volume gains reflect sales growth from customer retention rather than market share expansion.
- Convenience and specialty prescription offerings, evidenced by the outperformance of GLP-1 drugs, have proven effective with consumers. As GLP-1 prices decrease, we expect demand growth to outpace price declines, supporting our 4.9% average sales growth estimate over the next decade.
The bottom line: We plan to increase our C$43 fair value estimate per share for narrow-moat Loblaw by a low-single-digit percentage to reflect the time value of money. While shares declined 5% after the report on May 6, we still view the firm as overvalued at a 40% premium to our intrinsic value.
- In our view, the current market price extrapolates recent operating margin expansion to be permanent. However, we expect operating margins to narrow to 6.1% over the next decade from 2025’s 6.9% due to limited pricing power in a highly competitive industry.
Coming up: The sale of PC Financial has cleared regulatory requirements and should close in the third quarter. Loblaw plans to direct a significant portion of the USD 600 million proceeds to share buybacks, which we view as an improper use of capital given shares are overvalued to our intrinsic value.
