Loblaw cites increased competitive intensity (L CA)
Loblaw (L CA) reported Q3 EPS of C$1.30, $.02 better than consensus expectations. Revenue grew 6.9% YOY while EBITDA grew 2.1%, and EPS was up 4%. Food retail SSS increased by 6.9%, with basket size making up for a decrease in traffic. The average item price was up 5.3%, which management said was mostly due to mix rather than price inflation. Inflation was roughly 1.8% for the quarter. E-commerce grew 175% to the penetration of ~4%. Management said e-commerce gross margins are accretive due to a better mix with the incremental digital costs allocated to SG&A. The $3-5 fee being charged for click and collect helps offset costs that the U.S. grocers are generally waiving currently. Shoppers Drug Mart SSS increased 6.1%, with pharmacy up 10.3% and front end up 2.4%. Prescriptions were up 5%, with the average price up 4.9%. So far, in Q4, food retail SSS was in line with Q3, while drug SSS decelerated from the change in prescription limits.
Retail gross margins contracted 30bps while total gross margins contracted 50bps. Food margins were negatively impacted by mix and promotions. Management said, “it’s actually quite competitive out there in terms of intensity that we’re seeing. So we did feel that it was important to make some investments in price through this time.” Drug margins were impacted by the change back to 90-day prescription refills. SG&A leveraged 10bps.
Loblaw is on our short bias list. Next year’s comparisons are not that difficult, but that’s because it sees a muted benefit from the pandemic compared to other grocers. In this case, easy comparisons are not a good thing because there will be no recovery next year.
Food prices inch higher in October (ACI)
U.S. consumer prices on a seasonally adjusted basis were flat in October, after increasing 0.2% in September. The food index rose 0.2% in October after being flat in September, with the food away from home, increasing 0.3% and food at home increasing 0.1%. The food at home prices reversed a three-month decreasing trend. On an unadjusted basis (how companies report), food CPI rose 3.9% for the 12 months ended in October. The food at home was up 4.0%, and food away from home was up 3.9%. The differential between the two inflation figures tightened to the smallest amount since the pandemic began in March, as seen in the chart below.
All six major grocery store food group indexes rose with fruits & vegetables up 2.6% and meat up 6.1%. The index for food away from home increased by 0.3% in October, less than the 0.6% increase in September. For the 12 month period, the index for limited-service meals increased 5.7% while full-service meals increased 2.8%. Meat prices have been a driver of higher food prices for much of the pandemic until September, as seen in the IRI chart below. In the two most recent weeks, meat prices have trended above general food prices.
Dairy declines see a reprieve during the pandemic (STKL)
After years of declines, the milk category grew 7.8% to $16.3B during the 52 week period ended Sept. 6, according to IRI, with unit sales of 1.5%. The refrigerated whole milk subcategory grew 10.2% to $5.4B, while the low-fat subcategory grew 5.1% to $7.3B. The flavored milk/eggnog/buttermilk subcategory grew 3.1% to $1.6B. The Dairy Farmers of America said, “while foodservice and school milk have taken a hit this year, with more families preparing meals at home, we saw increased sales of milk at grocery stores early on. And now retail milk sales remain fairly steady.” Still, there are challenges for the dairy industry, including students attending school from home, the growth in plant-based milk, concern about cow emissions, and the National School Lunch restrictions on the whole and 2% milk. Global Market Insights projects plant-based milk to reach $21B by 2026.
