Analyst Note| Dan Wasiolek |
No-moat Loblaw posted second-quarter results that reflected its ability to fend off ongoing inflationary pressures, although it operates in a space where price is the primary determinant amid ever more value-oriented consumer purchasing decisions. Despite experiencing a soaring food cost inflation rate of 9.6% (per management), Loblaw improved its profitability. In fact, gross and adjusted EBITDA margins expanded in the quarter—up 60 basis points to 32.3% and 70 basis points to 11.7%, respectively—driven by a favorable mix shift to higher-margin categories such as over the counter and cosmetics. But we don’t think this mix shift is permanent; we continue to expect fierce competition in the industry, which drives our long-term gross margin forecast of 30%-31%.