No-Moat George Weston’s Business Remains Healthy; Shares Fairly Valued

No-moat George Weston’s second-quarter marks largely mirror those of no-moat Loblaw’s, given 99% of its sales contribution is from the Canadian retailer. George Weston’s revenue checked in at CAD 12.98 billion (up 2.7%), generally in line with our full-year top-line growth forecast of 3.4% (given higher sales in the back half). Improved profitability failed to surprise (up 60 basis points to 12.2%), aided by favorable mix shifts in drug retail (28.8% of sales at Loblaw). Amid Canadian consumers’ constrained pocketbooks, we are encouraged by Loblaw’s extensive offerings at its value-tiers, well-perceived private labels, and PC Optimum loyalty program (which enables savings of up to 10% on grocery bills, per management). In addition to the grocery retail business, Loblaw’s continued momentum in drug retail strikes us as astute. Upon acquiring Lifemark Health Group, a rehabilitation services provider with more than 300 clinics across Canada, in May, Loblaw started opening Canada’s first walk-in clinic in June. We think these moves dovetail well with Loblaw’s existing services in drug retail and should help drive further foot traffic. While immaterial to the consolidated result, Choice Properties’ healthy occupancy rates (97.6% in the quarter) in its diversified portfolio continue to give us confidence in the symbiotic relationship within George Weston’s business. Taken together, despite the intense competition we expect ahead, we think the above factors should continue to drive stable top-line growth, which we model at a low-single-digit rate longer term.