Loblaw, Metro, and George Weston: Canadian Grocers Lack a Moat Amid Intense Price Competition

We believe Canadian grocers Loblaw, Metro, and Loblaw’s parent George Weston WN, have failed to build a durable competitive edge, given the commoditized nature of food retail where low prices remain the key point of differentiation. We’ve tweaked our valuations but see value in George Weston’s shares.

We raised Loblaw’s fair value estimate to CAD 117 per share (from CAD 112) due to a higher sales CAGR assumption (of 2.9% versus 2.5% in the prior model) for the 10-year forecast period, driven by a more favorable pharmacy sales forecast. The bump on the top line more than offset our tapered assumptions for operating margins (5.4% on average over the same period, versus 5.6% previously) given our expectation for higher private-label and e-commerce spending. At a 2024 enterprise value/adjusted EBITDA multiple of 7.5 times on our fair value estimate, shares strike us as fairly valued.

Based on lowered operating margin assumptions—6.6% on average over the 10-year forecast period, versus 7.3%—we’ve trimmed our intrinsic valuation on Metro to CAD 69 from CAD 71. We anticipate Metro will have to invest more in private-label innovation and data analytics to stay competitive. Our revised fair value estimate implies a 2024 enterprise value/adjusted EBITDA multiple of 9.5 times, rendering shares fairly valued.

For Loblaw’s parent George Weston, we’ve lowered our fair value estimate to CAD 168 per share from CAD 182 primarily due to an increase in our discount rate assumption to 6.9%, from 6.5%. We view the firm’s financial results as inextricably linked to the performance of Loblaw, thus the discount rate we use for Loblaw should apply to George Weston as well. The higher discount rate is partially offset by upticks in sales CAGR to 2.9% (versus 2.6%) to reflect a better growth outlook in pharmacy sales and in average operating margin, to 6.5% (from 6.4%). Even after accounting for the fair value cut, we view shares as undervalued, trading at a 10% discount.