COVID-19 has mixed effects on Loblaw

COVID-19 has driven strong sales growth at Loblaw. Problem is, the costs associated with the pandemic offset the sales benefit to the company in the second quarter.

loblaw

Costs associated with the COVID-19 pandemic have offset strong sales growth at Loblaw.

Consumer goods stock Loblaw’s second-quarter profit declined year over year as strong growth in sales was insufficient to overcome COVID-19 related costs. The company invested $282 million to protect and benefit employees and customers, with about $180 million related to temporary pay premium costs which included a one-time bonus for store and distribution employees of $25 million. Though it continued to incur COVID-related costs beyond the second quarter, it did so at a reduced rate, reflecting a greater degree of stability in store and distribution centre operations.

Loblaw Companies Ltd. (TSX—L) has two reportable operating segments. The retail segment consists primarily of corporate and franchise-owned retail food and associate-owned drug stores. This segment also includes in-store pharmacies and other health and beauty products, apparel and other general merchandise and supports the PC Optimum program. The financial services segment provides credit card services, the PC Optimum program, insurance brokerage services and telecommunications services.

COVID hits the bottom line

For the second quarter ended June 13, 2020, Loblaw made $266 million (adjusted), or $0.74 a share, compared with $373 million, or $1.01 a share, in the same period of 2019.

The results reflected a decline in the underlying operating performance in the retail segment, which was driven by an increase in selling, general and administrative expenses due to an increase in COVID-related expenses and increased depreciation and amortization. The results also reflected a decline in the operating performance in the financial services segment.

Revenues, however, rose 7.4 per cent to $12.0 billion, thanks mostly to a 7.9-per-cent increase in retail sales. Excluding the consolidation of franchises, retail segment sales were up 7.2 per cent, due mostly to positive same-store sales growth and an increase in retail square footage. COVID-19 contributed to food retail same-store (stores open a year or more) sales growth of 10.0 per cent.

Financial services segment earnings before income taxes declined 43 per cent $12 million. The decline partly reflected an 18-per-cent drop in revenue, driven by lower customer spending and the partial closure of The Mobile Shop kiosks due to the pandemic. The lower earnings also reflected higher credit losses and an increase in expected credit losses, also due to the COVID-19 pandemic.

While the pandemic negatively affected earnings in the second quarter, it has also supported and accelerated growth in certain strategic areas such as Everyday Digital, Connected Healthcare and Payment & Rewards. The company’s investments in Everyday Digital, for example, have let it offer Canadians a choice of shopping in-store, or online with either home delivery or pickup options. Consequently, e-commerce sales rose 280 per cent in the second quarter.

The stock trades a reasonable multiple per share of what Loblaw should earn in 2020. Its annual dividend of $1.26 a share yields 1.8 per cent.

Loblaw is a buy for growth and some income.

This is an edited version of an article that was originally published for subscribers in the October 23, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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