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A Look at Loblaws
Loblaw Companies has been trying to navigate its way through some rough retailing waters lately. Canada’s dominant supermarket chain has seen share prices eroded and a shiny image tarnished by a series of poor results. It is an unaccustomed position they find themselves. Is Loblaw stock undervalued and thus represents a good investment? The treacherous course is one they have pretty much charted for themselves.
Almost thirty years of unchallenged growth and prosperity in which the company demonstrated itself a food merchandising model for the world to copy has accustomed investors to reliable, handsome dividend payouts and consistent, reasonable share price growth. But, in January, 2007, the company reported its first annual loss in 20 years, from a year in which the share price slipped below $45. Also during 2006, Dominion Bond Rating Service downgraded Loblaw debt due to weakening earnings and increasing grocery business competition. At the same time, brokerage Merrill Lynch advised shares had been downgraded to “sell” because of unsure management shake-ups.
What does this all mean to the individual investor looking to reach his own decision on the viability of investing in Loblaw stock?
In the first place, remember it is your money, so you will want to form your own opinion on this company, the stocks’ potential, and its place in your own portfolio. To do that, the individual investor should apply some of the analytical tools discussed in other areas of this site to make an evaluation and identify some the influencing factors you consider key. We have chosen Loblaw for this exercise because, despite its merit, the stock is an excellent example of wildly varying opinion among investors.
We will look at the history of this company and asses the management and market in which this business operates. We will look at the strengths and weaknesses of the financial position reported in the annual statements, and review some the vital ratios related to the performance of Loblaw shares in the market.
The business
Troubled times are nothing new to Loblaws. Back in the mid-1960’s the company found itself the possessor of a lot of worn-out, rundown stores trying to eke out an existence in the wrong locations. By the early 1970’s, the company had lost so much ground to competition such as Dominion, Miracle Mart, and A&P, the situation appeared irreversible. Loblaw teetered on bankruptcy and the fabled Weston family majority ownership questioned the viability of turning fortunes around. Garfield Weston decided the grocery chain was worth saving and called upon his son Galen to turn things around. Galen assembled what turned out to be some of the most innovative and forward thinking merchandisers ever – most notable being President Dave Nichol – to totally change the way Loblaws approached food retailing. Some 40 years later and with most of those years an unfathomable success, a part of history has repeated itself. Galen Sr. has called upon his son, Galen Jr. to re-shuffle the deck and find the formula to re-establish the Loblaw merchandising position.
Your decision on the business has to take careful consideration of the soundness of a favorable track record and reasonable expectations for the future.
The simplified statement about the food business is that people always have to eat. The implication is all that needs to be done is give them a good place to shop and a good price and the market will buy their food from your establishment. As never before, companies such as Loblaw have to be concerned with how people eat. Get that right and it helps identify the competition. Do restaurants pose a greater threat than Wal-Mart for example. Are consumers prone to prefer innovative, high end, ready-to-eat products over traditional grocery staples? Do customers really want to do all their shopping in a huge, one stop location or do too many consider this a hassle?
A few years back, Loblaws management determined they were in for a fight for their existence against the Wal-Mart invasion. It is safe to summarize the situation at the time as a grocery-merchandising giant that dabbled in general merchandise against a general merchandising giant that dabbled in grocery items. The Wal-Mart general merchandise giant was about 12 times larger than the Loblaw grocery giant.
Loblaw prepared by expanding their merchandise line well beyond their accustomed grocery business, revamped the distribution system to improve inventory turns, cranked up their property expansion plan to maintain market share in key geographical growth areas, and launched into a corporate image shift with new branding of the “Wal-Mart” sized retail facilities such as Great Canadian Super Stores in Ontario. The plan –which management never did admit to being Wal-Mart centric- did not work and the company was faced with too much stale inventory, a flawed distribution system, and lots of capital investment that was not returning the necessary sales per square foot return.
Reporting on the situation the company is in, Galen G. Weston admitted, “We have not been focused on our core strength of being the best food retailer in Canada, our organization is too complex and is ineffective and slow to respond to the customer and to the competitive environment. Our actual prices relative to Wal-Mart’s are significantly higher than we thought”. As much as 20% higher in some categories.
Last year, Loblaws President John Lederer was replaced by Mark Foote, who was hired away from Canadian Tire Corporation. Canadian Tire is another retailer threatened by the Wal-Mart presence but, their growth has continued unabated. There is reason to question the ability of a general merchandiser to show the way to a grocer, particularly at a time it appears the way to renewed success is a return to concentrating upon the retailing principles that changed the company from its first big crisis point in the sixties.