Buy Metro Inc. as it regains its stride

Metro Inc. (TSX─MRU) did well in the first quarter of fiscal 2015. Its sales and earnings per share climbed. The company is expected to earn more for the full year. As a result, it raised its dividend. Metro will soon split its shares three for one. It remains a buy for long-term share price gains and modest, but rising, dividends.

In the three months to December 30, 2014. Metro earned $117 million, or $1.35 a share, excluding one-time items in both periods. This was up by nearly 22 per cent from $104 million, or $1.11 a share, a year earlier. This is an improvement from, say, the second quarter of fiscal 2014. In that quarter, the company earned an adjusted $144.5 million—exactly the same as in the second quarter of fiscal 2013.

Buybacks quicken earnings growth

Earnings per share outpaced total earnings. That’s because Metro repurchased 812,000 shares in the first quarter. This exceeded the issuance of 133,000 shares from the exercise of stock options. It bought back a net 6.9 million shares last year. Metro can repurchase up to 4.888 million shares by September 9.

In the first quarter of fiscal 2015, Metro’s sales rose by 5.2 per cent, to $2.841 billion. Same-store sales increased by 3.8 per cent—the highest level since 2009. Helpful inflation was up by three per cent. Management also credits “our merchandising strategies and investments in our store network”.

Metro’s regular operating costs as a group rose by five per cent—less than sales. While its income taxes rose by 7.1 per cent, this was more than offset by an increase of 37 per cent from the company’s stake in Alimentation Couche-Tard’s earnings.

Metro’s better earnings are confirmed by a 10.5 per cent jump in its first-quarter’s cash flow, to $196.3 million. This greatly surpassed net capital spending of $32 million and dividend payments of $25.7 million. The company spent part of the excess cash flow buying back its own shares.

Subtract Metro’s cash of $196 million from debt of $1.325 billion and you get net debt of $1.129 billion. This is under 1.4 times its cash flow of $816 million over the latest four quarters. This is well within our usual comfort zone of two times or less. Particularly since the company generates predictable cash flow.

Metro is raising its dividend by 16.7 per cent, to a yearly $1.40 a share (prior to the upcoming three for one stock split). The increase reflects its intention to pay out a quarter of its adjusted earnings in dividends. This is up from 22 per cent last year and 20 per cent the year before that.

Management is optimistic about Metro’s outlook. It writes, “We are pleased with our first-quarter results. Our merchandising strategies and investments in our retail network are well received by our customers and we are confident that we are well-positioned to continue to grow over the coming quarters.” Indeed, Metro is expected to earn $5.84 a share in fiscal 2015. That represents earnings per share growth of 13.8 per cent.

Target’s exit is insignificant

As a franchisor, Metro supplies 14 Brunet Target pharmacies in Target stores in Quebec. Target’s decision to close all of its Canadian stores will end this business. Management writes, “We will proceed shortly with the closure of these pharmacies and the costs incurred will not be significant for the Corporation.”

Then again, Metro acquired 75 per cent of Première Moisson. It has 23 stores and three distribution centres in Quebec. We expect it to add net income and sales of at least $10.3 million and $109 million to Metro’s results in 2015.

Metro Inc. remains a buy for further long-term price gains and modest, but rising, dividends.


The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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