EUR 850.00 For Business Accounts Only

Morningstar | George Weston's Food Segment Continues to Face Headwinds; Shares Undervalued

With its retail Loblaw operations (96% of 2018 revenue) having already reported 0.2% sales growth for the year (near our 0.7% estimate) there was not much new material information in no-moat George Weston's fourth-quarter results. George Weston reported 2018 revenue growth and earnings per share of 0.6% and $6.85, respectively, compared with our 0.2% growth and $6.81 estimates. We don't expect a material change to our CAD 117 fair value estimate and see shares as undervalued.

As expected, George Weston saw several headwinds in its food operations (4% of 2018 revenue) last year, which led its sales to decline 5.4% versus the 6% fall we modeled in this segment. Weston Foods was impacted by a key customer loss in the third quarter of last year as well as rationalizing its product offering and facing input and transportation cost headwinds. And while management mentioned that service and quality levels were improving and leading to more constructive discussions with customers (the company said it secured a meaningful piece of business during the fourth quarter), it also mentioned that the aforementioned headwinds would continue into 2019, leading to guidance that the business would see its revenue fall again in 2019. As a result, we plan to reduce our 0% sales estimate for 2019 down a few percentage points, which we don't expect to have any meaningful impact to our fair value estimate.

Loblaw is seeing good progress on building out its e-commerce platform (now around 1% of total sales), and the company believes it is gaining digital share in Canada (unquantified). The company now has 670 pick-up locations, up from over 500 in November 2018, while its loyalty membership has grown to 18 million, versus 15 million last quarter. And Loblaw expects to continue to invest into technology, building out its e-commerce network further, along with growing other initiatives like self-checkout and discount offers on near expiration items on mobile devices.

Within brick-and-mortar, Loblaw is maintaining share, as it goes against wide-moat Walmart and Costco (among others). Its food retail business posted 1% same-store sales growth in 2018, near our 1.1% forecast. As seen in the previous quarter, Loblaw's internal inflation was moderately below industry CPI, and although mix likely accounts for most of the difference, it still highlights the challenge operators have to pass pricing along to customers in the competitive environment.