Wednesday, October 19, 2011

Sobeys challenging Loblaw Companies' dominance in Canada's grocery market (superstore competition, provigo, no frills, loblaws)

   Between the years of 2008 and 2011, annual sales at Empire-Sobeys Ltd rose 12% to over $16B (53 weeks ended 2Q12 up from $15.5B the year prior, in the 1st qtr $4.15B up 3.2% while operating income for the qtr was stable at $150M) compared to only 4.9% for Loblaw Companies (in the 3q11 sales were 2% higher qoq, 2q11 qtr Loblaw sales didn't grow at all qoq steady at $7.27B (rev up 6% though quarter to quarter)/ income up 16m, ebit up 3m) and 0.8% for Metro Inc (fiscal 2011 $11.431B). Since 2006 the first full year that A&P Canada was part of Metro, Metro's sales have increased by only 4.3% compared to 24.7% for Sobey's; Minor boost for Sobeys came in 2007 when it acquired BC chain Thrifty Foods for $260M, for the past six years Sobeys has led the industry in same-store sales growth. Sobeys latest quarterly dividend was 22.5 cents per share. When we look at the last fiscal year annual revenue at Loblaw Cos was up only 0.3% compared to 3% for Sobeys (Sobeys 12 month period ended in May 2011, Loblaws January 2011). Most of the increase in Sobeys revenue came from 1) Larger new stores (in terms of square footage, closing the gap between it and Superstore 2) Modest inflation 3) Product/services innovation. Investments/other operations provided roughly 1.2% of revenue ($51.1M). Food retailing sales up 3.3% in the quarter (surpassing $4B to $4.106B). Consolidated funded debt fell 12.8% to $1.1004 billion. In the discount market Loblaw's No Frills leads all other grocers, just the 152 No Frills stores in Ontario made $3.4B in sales in 2010 more than Sobey's FreshCo and Metro's Food Basics combined. (June edition: Grocery Trade Review)

Food retailing market share in Canada among grocers: Loblaw Companies 43%, Sobeys 21%, Metro Inc 16%. (Atlantic Farm Focus: Sobeys to supply Target)

Sobeys same store sales growth was 1.7% in the 1st quarter of the company's 2012 fiscal year (ended August), that compares to Loblaw Companies reported 1.3% in its 3rd qtr (ended October) and -0.1% in its 2nd; Sobeys led the industry in same store sales for six consecutive years (the latest a 1.3% increase in 2011).  In the 2nd qtr Sobeys same store sales +1.9% vs +2.5% for Loblaws.  Loblaws earnings in the quarter ended October 2011 totalled $236M up 19.8% even though revenue increased only 2.0% to $9.7B, only the second quarter to quarter increase since a 3.5% decrease back in March (4Q sales grew strongly at over 3%). Loblaws revenue has been inconsistent quarter to quarter due to flat food sales and lower sales in drugstore, apparel and general merchandise. Parent Empire Company Limited has actually been controlled by the Sobeys clan since 1947 when Frank Sobey bought it for its land and ability to be transformed into an investment company. 1947 was also the year Sobeys opened its first supermarket store in Pictou. It was on the eve of Sobeys' 100th anniversary celebration of JW's birthday (JW was originally a marketer of meats) that Sobeys purchased Empire Company outright, acquiring the 27.9% of shares it didn't already own for $1.06B on April 26, 2007 for $58/share ($2-4 premium over the fair market value). In the fourth quarter of fiscal 2011 sobeys attributed the drop of 13.8% in sales from other operations to lower box office attendance due to movies having less consumer appeal. In the discount food market FreschCo is a new invention by Sobeys aimed squarely at Loblaws' No Frills ($3.4B in revenue or about 11% of Loblaw Companies annual sales). No Frills has been in business since 1978. Only about 12% of the grocer market in the maritimes is in the discount market, that's in stark contrast to Ontario (45%) and Quebec (33%). No Frills sold $3.4B worth of goods in Ontario alone in 2010 more than its two main competitors combined. (June edition: Grocery Trade Review)

In 2011 Sobeys expanded 12 stores (down from 13 in 2010/11 in 2009), opened 44 (up from 41 in 2010/47 in 2009) and closed 39 locations (down from 52 in 2010). Sobeys went private in 2007 when it became a subsidiary of Empire Company Limited following Empire's purchase of $1.06b worth of Sobeys outstanding common shares bringing its interest up to 100%. The company's 2011 revenue is 61% higher than it was in 2002 (145% increase in book value per share: 47.76).

Brand Diversification and the Ethnic Market
Sobeys has also been more open to diversification of its brands; After Metro acquired A&P it spent $200M to completely convert Loeb/A&P locations into Metro stores, however Sobeys chose a different route; After acquiring Price Choppers in the 1990's it left the brand largely intact for more than a decade before rebranding it as FreshCo, the other acquisition IGA/Oshawa Group ($1.5B deal in 1998 tripled its size and made it into a national company) was left intact. Initially, Sobeys did this in a bid to win over customers through customer appreciation efforts however brand diversification appears to have benefited Sobeys in the long run because it has allowed it to tap into different markets more effectively (Loblaws gained a bigger market share after it acquired T&T and launched No Frills and now Sobeys is doing the same with FreshCo, that chain has proven popular among ethnic customers, a consumer base that already represents over 35% of shoppers in Ontario and will represent 31% of all Canadians by 2031. (Sobeys takes on Loblaws/Weston to court discount and ethnic shoppers)
Sobeys has experienced tremendous growth over the last decade even before its recent success, between 2001 and 2006 Sobeys stock price rose by over 68%. Sobeys also has a significant stake in Canadian real estate (45.9% of Crombie real estate investment trust, 40% of Genstar Development Partnership) and with Canadian real estate prices climbing (average home price up 6.5% in September/# of properties sold up 2.7% qoq) those investments are bound to pay off for Sobeys. Crombie reit's properties include both high end assets (Barrington Place Shops, Cogswell Tower, CIBC Skyscraper in Halifax) and more traditional retail assets (Greenfield Park IGA plaza, Quebec). Sobeys also holds 100% ownership of Canada's second largest chain of movie theaters, Empire Theatres (Sobeys has operated cinemas since 1984). 2011 is also the year Sobeys converted most of its mainline locations into 24 hour supermarkets taking away from Superstore a key competitive advantage. About 85% of Empire's assets are associated with the food retailing business. Sobeys first reached $1 billion in sales in 1987, in 1999 (2000 fiscal year) Empire-Sobeys sales surpassed $10 billion for the first time (reflecting the first full year the Oshawa Group was part of it). Although revenue increased 75% that year, net income fell 35.7% to $86.7m.

Agreement With Target Canada Gives Sobeys Deeper Market Access
    On September 23, 2011 Target Canada announced that an agreement had been reached with Sobeys in which Sobeys will become the primary supplier of grocery items. The deal is big for Sobeys because it will be able to sell its own private label items outside of its own locations of Sobeys, FreschCo, IGA, etc. A similar agreement made in the US between Target and SuperValu Inc significantly boosted SuperValu's revenue and market access (operates over 2,500 locations but that number nearly doubles when Target and other stores it serves as primary distributor are included). 125-135 Target locations are slated to open begining in 2013. Since the news broke about a month ago Sobey's stock is up 6.2%. In the discount supermarket sector Sobeys' FreschCo competes directly with Loblaw's No Frills throughout much of Canada (though FreshCo hasn't yet been introduced to key areas such as Halifax), while Superstore (Real Canadian or Atlantic depending on the region, the superstore brand represents 1/5th of Loblaw's corporate run locations), Provigo (taken over in 1998/1999, presently Provigo is the largest brand by locations, 2X as many as Superstore), Maxi. Great Food and Zehr's take on Sobeys, IGA and Foodland head to head in regular priced food retailing in central and eastern Canada. About 30% (<400) of all Loblaw locations are discount 'no-frills' (removal of non-essential items to keep prices low) grocery stores (no-frills/valuemart/freshmart/wholesale club), that compares to less than 20% (252) for Sobeys' thrifty foods/freshco. No Frills sold $3.4B worth of goods in Ontario alone in 2010. (June edition: Grocery Trade Review)

On November 15, 2011 announced that it had reached a deal with the National Bank of Canada involving the sale of 15,000 tonnes worth of CO2 greenhouse gas emission gas credits (annually) to the bank, allowing the bank to be a neutral emitter (Sobeys currently has an excess of credits in Quebec due to improvements at IGA locations where harmful refrigeration gasses have been replaced).
Stats from the last two reported quarters
Empire-Sobeys - Fiscal 1q12 & 4q11: revenue was $8.3415 billion up 6.1% from the 1q11 & 4q10 ($7.8585), ebitda $512.8m up 6.3% from $485.8m, profit $171.7m up 7.5% from $159.8m.
Loblaw Companies - Fiscal 2q11 & 3q11: revenue was $16.841b up 1.2% from 2q10 & 3q10 ($16.646), ebitda $1143m up 7% from $1068m, profit $433m up 14.6% from $378m.
Metro Inc. - Fiscal 3q11 & 4q11: revenue was $6.233b up 1.8% ($11.4306b up 0.8% for the fiscal year)
ebitda $420.7 million down 2.9% ($773.4m up 6.8% for the year) with net earnings of $211m down 1.1% ($386.3m up 3.4% for the year).

For Empire-Sobeys, food retailing made up 98% of sales and 90% of operating income in both 2011 & 2010. The commercial real estate business contributes about 30% of funds from real estate operations even though it only contributes less than 15% of real estate revenue. Food Retailing: net debt/net total capital ratio was at its lowest level in 2011, hitting 13.4% it was as high as 32% just three years ago (2008). There are about 286 standalone Sobeys locations across Canada (25% of the company's locations). In fiscal 2011 57 freschco stores were opened, which exceeds units opened by main competitor No Frills. In 2005 it acquired the Oshawa Group, owner of IGA Canada. In March 2002 Sobeys sold Serca Foodservice to SYSCO for $411M.

Sobeys sells Wajax Income Fund but Maintains Interest in Halifax property owner Crombie Reit
->Since March 2006 Sobeys sold 105 properties to Crombie REIT raising $897m in 2 transactions.
->In 2010 Sobeys lowered its debt to capital ratio from 32.7% down to 29.3% and consequently (in May) both Standard & Poor's and DBRS raised Sobeys credit rating.
->In 2011 Sobeys divested itself of Wajax stock by selling 27.5% of Wajax Income Fund for $121.3m (used the proceeds to pay down debt). The market value of all of its real estate investment holdings was $451.2m on May 7, 2011 compared to $487.7m a year earlier (decrease was entirely due to the divestment of its Wajax investment which was worth $117.9m in 2010).
->During fiscal 2010 food retailing/real estate represented 94% of net income. At the end of 2010 total locations (food retailing) under the various banners numbered 1,334 (28.1m square feet) in 836 communities. In 2011 free cash flow fell to $132.6m from 350.1M.

   In just the last year (May - May) Sobey's cash and cash equivalents are up 53.8% to $637M while long term debt is up 32% to just over $1 billion (at Loblaws cash and cash equivalents are down 26.06% to $678M which is only 6% more than Sobeys while long term debt at Loblaws is up 24% to $5.4B). As compared to the corresponding quarters in 2010, quarterly revenue in 2011 has been up each quarter (qoq). Operating income for each quarter was higher than the corresponding quarters of 2010 with the exception of the 3rd qtr ($101 vs $110 mil). Between the two years net income per share was highest in the 2011 qtr ended October ($1.94/share which represented an increase of 88.3%) & the 4Q of 2011 ($1.36/share, 29.5% higher). Same store sales growth was at 1.7% in the first quarter of 2011 (Sobeys has led the industry in same store sales growth for the past five years). (How Sobeys is taking on Loblaws ) Sobeys total sales in Q1 2012 were $4.15B, $128.3 million higher than the corresponding period the year before (up 3.2%). By the end of September 2011 Sobeys lowered its funded debt to capital ratio to 25.5% down from 30.3% the previous year. Since 2001, fiscal year dividends have more than quadrupled from 20c to over 80c per share. (Investor Fact Sheet 1Q12:, 1Q12 Report: In the quarter ended August 2011 revenue, ebitda and earnings were all up between 3.3 and 3.6% (food division).

Though already the largest food retailer in Canada with over 13M Canadians shopping there weekly (40-43% market share), Loblaw Companies is gradually transforming into a hypermarket with a major expansion into the textile/clothing industry (Joe Fresh Style has stand alone stores in the United States and has plans to open 4 more in Toronto and Quebec in the second half of 2011). Revenue at Loblaw Companies fell slightly in the second half of 2011 to $14.15B from $14.18B.

Number of shares; earnings per share as of last quarter reported, employees
Sobeys-Empire 68.0M; 131c (up 4.0%) - 13 weeks, 49,000
Loblaw Companies 282M; 56c (steady) - 13 weeks ended May 26, 2011, 136,000
Metro Inc 102M; 121c (up 8%) - 16 weeks, 40,500
Couche Tard 75c (up 11.9%) - 182.5M; 12 weeks, 53,000


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