Morningstar Maintains Sell 

Morningstar (Analyst Rank #55)  has reaffirmed its sell rating on Loblaws, one of Canada’s largest grocery chains, despite the company’s solid first-quarter results. The decision comes as Morningstar sees no significant reason to adjust its fair value estimate of CAD 124 per share for Loblaws.

In the first quarter, Loblaws reported a 5% increase in sales and an 11% rise in adjusted earnings per share. This performance reflects the company’s continued ability to attract grocery and drugstore spending in Canada, particularly amidst consumer belt-tightening. Loblaws’ success is attributed to its popular discount banners, strong private-label offerings, and effective precision marketing through its PC Optimum loyalty program.

Morningstar’s analysis indicates that Loblaws is well-positioned within the market. However, the firm sees no need to alter its 2024 estimates, forecasting a 4% increase in sales and a 10% rise in adjusted EPS. Over the next decade, Morningstar projects a 3% compound annual growth rate for sales and expects operating margins to average 5.2%.

Despite Loblaws’ positive performance, Morningstar believes that the company’s shares are currently overvalued. Grocery retail sales saw a 4% increase, primarily driven by a 3% rise in same-store sales due to food price inflation and the addition of new stores, particularly in the hard discount format. However, data suggests that consumers are increasingly seeking bargains, leading to higher foot traffic but lower basket sizes.

In response to this trend, Loblaws has been strategically investing in its discount banners and in-house value brands, such as President’s Choice and No Name. Similarly, the drugstore segment saw a 4% increase in sales, with Shoppers Drug Mart’s wellness and beauty offerings driving store traffic and purchases. Additionally, the prescription drug business benefited from the cold and flu season.

Despite these positive indicators, Morningstar maintains its sell rating on Loblaws due to its assessment of overvaluation in the current market conditions. The firm suggests that investors exercise caution and carefully evaluate the stock’s potential risks and rewards before making investment decisions.