Loblaw Companies Ltd. is reporting third-quarter earnings of $164 million, up about 15 per cent when compared to the same quarter in 2014; however, some analysts are cautioning the company is still facing challenges in Canada’s competitive retail sector.
Loblaw’s recent purchase of Shopper’s Drug Mart appears to be helping the company’s bottom line, but strong competition from other players in the market will continue to dog the company says retail industry consultant Ed Strapagiel.
“Prior to the purchase they had some challenges, one of them being exposure to a very competitive food retailing industry,” he says.
He adds retailers like WalMart and Costco are planning major expansions in the next few years which pose a threat to Loblaw’s revenues. WalMart will be expanding their “SuperCentre” model with 15 new stores in Canada. Costco plans to build 25 more warehouses across the country.
“The thing about Costco is that they are really low profile. They don’t advertise, they aren’t public, they aren’t covered by the analysts yet they are the fourth largest retailer in Canada by revenue,” he says.
Another threat on the horizon is online retailer Amazon.ca. Strapagiel says they have made significant inroads into the Canadian market with strong holiday sales. He says WalMart views online companies like Amazon as a major threat and are ramping up their online presence.
“WalMart is very conscious of [Amazon] so they are battling Amazon…and you get a domino effect on companies like Loblaw,” he says.
This means Loblaw may find itself in a position where sales revenues might be impacted by this battle between the two online giants.
“There’s a lot of pushing and shoving going on there,” he adds.
Strapagiel says future growth for Loblaw lies in the continued integration of Shopper’s into Loblaw. He says it’s important that the company “doesn’t tinker” too much with the existing operations.
“If it ain’t, broke don’t fix it…but there’s always this temptation to play with things,” he says. “If they are wise about it they will be very careful about how they proceed.”
Despite the challenges, other analysts say the third quarter results point to a successful merger. Brynn Winegard, a professor at Ryerson University in Toronto, Ont. says despite the increased competition in Canada, Loblaw is in a good financial position. She says bringing Shopper’s into the Loblaw fold last year is achieving efficiencies company wide. This means the company is able to profit more.
“Year to date, their earnings are up nearly 350 per cent in net earnings. That’s huge. They’re doing wonderfully,” she says.
Winegard adds Loblaw appears to have paid-off all costs of the integration of Shopper’s. The 15 per cent increase in net profits proves that, she says.
“They’ve already accounted for the losses associated with the acquisition,” she says.
Another factor in Loblaw’s growth this past quarter is the Shopper’s chain itself, says Winegard. Drug sales are doing well with a 4.9 per cent increase in growth. The same quarter in 2014 only saw about a 2.5 per cent. It’s clear Shopper’s is also benefitting from the merger, says Winegard.
Attempts to get a comment from Loblaw about the third quarter results were unsuccessful, but Galen G. Weston, president and executive chairman noted in the report to investors that the grocery industry remains competitive. He added that the regulatory environment for healthcare continues to be challenging, but the company did achieve its goal of making Loblaw and Shopper’s efficient operations.
Loblaw Companies Limited: stock price.