EUR 850.00 For Business Accounts Only

Morningstar | Loblaw's Digital Investments Help Mitigate an Ongoing Competitive Market; Shares Overvalued

No-moat Loblaw is seeing success with its ongoing and wise e-commerce investments within the intensely competitive grocery market environment. That said, we don't expect a material change to our CAD 55 valuation, as the company's 2018 0.2% sales growth was near our 0.7% forecast. We see shares as overvalued.

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 its e-commerce network out further, along with growing other initiatives like self-checkout (which is improving efficacy and guest experience) and discount offers on near expiration items on mobile devices (which leverages its loyalty member database and reduces waste).

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. Meanwhile, Loblaw's drug retail business grew same-store sales 2.4% in 2018, slightly ahead of our 2% forecast, as the industry will continue to face health care reform pricing headwinds in the first half of 2019.