Metro Inc
INITIATING COVERAGE
RATING : HOLD
12 MONTHS PRICE TARGET : 74,45 $
September 23rd 2014
Highlights:
 Sound Management
 Business Model Adjustments
Concerns:
 Minimum wage raised in Ontario
 Increased Competition
 Regulatory Pressure effects on drugstores’
sales
 Online Grocery Shopping
Metro Inc. – FINANCIAL ANALYSIS
Summary
History ............................................................................................................................................. 3
Business Overview ........................................................................................................................... 4
Food retailing Industry description ............................................................................................. 4
Highlights: .................................................................................................................................... 6
Sound management ................................................................................................................ 6
Business Model Adjustments .................................................................................................. 7
Concerns ...................................................................................................................................... 8
Minimum wage raised in Ontario ............................................................................................ 8
Increased competition............................................................................................................. 8
Regulatory pressure effects on drugstore sales ...................................................................... 9
Online grocery shopping ......................................................................................................... 9
Financial Analysis ........................................................................................................................... 11
Profitability ................................................................................................................................ 11
Margins ...................................................................................................................................... 12
Activity Ratio ............................................................................................................................. 13
Liquidity Ratio ............................................................................................................................ 14
Solvency Ratio ........................................................................................................................... 15
Growth....................................................................................................................................... 16
Common Size Income Statement .............................................................................................. 17
Valuation ....................................................................................................................................... 17
Relative Valuation Approach ..................................................................................................... 17
Absolute Valuation Approach.................................................................................................... 18
Conclusion ..................................................................................................................................... 19
Bibliography................................................................................................................................... 20
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. – FINANCIAL ANALYSIS
History
Metro Inc is one of the most recognized grocery store banners in Québec and Ontario. With
more that $11 billion in sales accounted in 2013, we can indeed confirm its importance on these
markets. Metro built its notoriety throughout the years with a clear mission in mind, to satisfy
customers every day and earn their long-term loyalty. In order to do so, Metro’s management
makes sure to respect and foster four strong pillars which are being customer focused,
emphasize strong execution, lead the best team and finally, always consider shareholder value.
The first grocery exhibiting the sign Metro Inc. dates back to 1956, when a buying group of
independent grocers opens a new division called Groupe des épiciers Metro. At that time, Metro
Inc. groceries were quite different from what we are used to today. It’s only in 1972, when the
company renames itself Les Marchés d’Aliments Metro Ltée that the first “supermarket concept”
store is created. In November 1986, the corporation goes public through an IPO sold on the
Montreal Stock Exchange. In the same year, Metro buys McMahon Distributeur Pharmaceutique
and becomes proud owner of the well-known drugstore chain Brunet. In 1987, the corporation
buys La ferme Carnaval a 14 grocery-store chain focused on offering food at a discounted price.
From 1990 to 2009, Metro makes other important acquisitions that allow increased market
coverage like Steinberg in 1992, Loeb in 1999, A&P Canada in 2005 and GP in 2009. Finally, in
2011 and 2014 respectively, Metro acquires a 55% interest in Marché Adonis and 75% interest in
Première Moisson. In 2014, the company owns more that 566 grocery stores and 257 drugstores
in Québec and Ontario.
As of today, Metro Inc. has been paying growing dividends quarterly for more than a decade.
The company also puts a strong emphasis on share repurchase programs. For instance, from
December 2008 to August 2014, Metro constantly repurchased more shares than it issued,
bringing the number of shares outstanding from 111.1 to 85.2 millions. The corporation also
intends to keep renewing repurchasing programs for the years to come.
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. – FINANCIAL ANALYSIS
Business Overview
Food retailing Industry description
Metro evolves within a very competitive industry, where lots of massive players attempt to
increase their share of a slow growing market. Indeed, in Québec and Ontario, Empire, Loblaw,
Wal-Mart, Target, Jean Coutu and Costco are all in competition with Metro. However,
throughout the years, Metro made several acquisitions that allowed it to secure strong market
coverage and differentiate their business offer. More precisely, Metro operates on five different
segments of the retailing industry which are the grocery (supermarket) segment, discount
grocery store segment, drugstore segment, corner store segment and finally the high end
grocery store segment. The illustration below shows our classification by segments of the
different store banners managed by Metro coupled with our understanding of Metro’s
competitors’ market position. Banners included below are the ones operating in Québec and
Ontario. Some classifications may certainly be discussable and we did omit certain store but we
believe this figure illustrates approximately the intensity of Metro’s industry.
Several notes must be added to this figure to allow a good understanding of Metro’s operations.
First of all, keep in mind that the first three segments represent the core business of Metro,
therefore the corner store and high end division produce only a slight percentage of the total
sales. However, the high-end segment may hold profitable opportunities in the future and so we
will cover it later in this report. Note that Empire and Loblaw are Metro’s closest competitors.
Indeed, Metro, Maxi, IGA, Provigo and Loblaw are often located near each other and offer
similar products at similar prices to almost the same clientele. Moreover, Empire recently
introduced new store concepts called IGA Express and IGA Mini. These stores can be described
as a middle point between a full size grocery and a corner store. Empire here aims to offer very
accessible quality products to consumers. If these concepts expand their quantity of locations,
we think they could affect Metro. Whether or not the small current number of these concepts
will disturb Metro’s operations is questionable.
Also, Target is a grocery industry new comer and offers mostly packaged food. With that in
mind, we can understand the fact that Metro and its division Super C still have an important
edge over Target for now, which is fresh products. But by entering the discount grocery
industry, Target joins Costco and Wal-Mart. These three companies have a very strong
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. – FINANCIAL ANALYSIS
purchasing power that allows them to offer products at very low prices. From there, we can
understand that the introduction of Target in this field represents another layer of pressure on
Super C and Food Basics. We can conclude that this segment will certainly experience a high
level of competitiveness for the years to come. We believe this important offer of low-priced
food will not only affect Super C and Food Basics but also Metro’s supermarkets. Indeed, we
think Metro’s supermarkets will have to differentiate their offer from the discount grocery
stores because customers will be flooded with the “We have good products for good prices”
marketing strategy.
Metro – Retail Network (2013)1
1
Annual Report, Metro, 2013
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. – FINANCIAL ANALYSIS
Highlights:
Sound management
We strongly believe having an experienced team of managers, able to take sound decisions in
time when it is the most needed, represents one of the most important characteristics of a good
investment. However, it is often quite difficult to evaluate this component, since it remains
somewhat of a subjective quality. In Metro’s case, a careful study of its past performance
actually allows us to obtain an objective confirmation of its management ability. For instance, in
2009, when the US market was quite fragile and American companies started considering
Canadian market as a good ground for growth, management had to generate solutions to
prevent losing market shares. They decided to put together a program that would reward
consumers’ loyalty. They called it “Metro&Moi”. According to this program, each purchase gives
the customer a certain amount of reward in “point m” that allows a discount on future
purchases. It is not the idea itself that impressed us but actually how they truly maximised the
potential of it. Indeed, before deciding how they would set up the program, they asked their
consumers precisely how they wanted it in order to assure it would please them. From there,
Metro contacted Dunnhumby, a company known internationally for its development of effective
loyalty program. More precisely, Dunnhumby uses the data of purchases made with the
program, analyses it and comes up with efficient way to interest, attract and satisfy consumers.
Indeed, each time a customer uses it’s “Metro&Moi” card to earn rewards, Metro records the
transaction and analyses it with the help of Dunnhumby. These inputs become a real gold mine
for managers. For instance, they allow Metro to send personalized promotion flyers to
customers based on their recorded consumption. It also allows them to assess the effectiveness
of their promotion and the importance of purchases made with the product promoted. That
way, they can evaluate which promotion is the most valuable in terms of total item purchased.
Dunnhumby’s system goes as far as to give the opportunity to Metro’s suppliers to analyse the
consumption of their product according to different situations. Metro qualifies this program as
a real success, reaching more then 1 350 000 members in 2013, which they define as
approximately 40% of Québec’s household2. Some describes it as a game changer.
2
Annual Report, Metro, 2013
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. – FINANCIAL ANALYSIS
We liked how managers admitted not having the knowledge to optimise their program and
reached for the best company in this field. This modesty allowed them to put together a very
strong loyalty program. We believe this kind of business behavior coupled with the development
of the entire business model are good demonstrations of the effectiveness of metro’s
management.
Business Model Adjustments
As mentioned earlier, the competition within the discount grocery stores segment is reaching a
very high level. Indeed, Wal-Mart, Costco, Target, Super C and Food Basics are currently fighting
each other for customers. This competitive pressure even brings supermarkets to adapt their
offering. In fact, supermarkets adjust their business model to provide a more high-end
experience to customers. New displays, exotic fruits, imported products and more are used to
reach a whole new clientele. And that’s a tendency noticeable in every supermarket store
banners. But we particularly like the way Metro is handling this transition.
First of all, we believe Metro’s majority stake in Marché Adonis represents an interesting way to
differentiate their offering. Marché Adonis specializes in perishables Mediterranean and MiddleEastern products. We consider this kind of product to be quite distinctive to what is usually
offered by supermarkets in Québec and Ontario. Moreover, it is generally found in small specific
groceries, so that having them all into one supermarket is, we feel, quite attractive to
customers. We appreciate the fact that Marché Adonis’s business model focus on pleasing
ethnic population and we think this may hold great possibilities. Indeed, our analysis allowed us
to understand that direct competition for a supermarket focused on offering Mediterranean
products is less significant. Moreover, we believe this venture may bring sizable profitability to
Metro since we expect people to be willing to pay higher prices for distinctive products. Finally,
we feel that the increasing ethnical diversity may act in Metro’s favor as well. In 2013, seven
Marché Adonis were open for business, reaching $236 million in sales. We believe Marché
Adonis represents a good opportunity for Metro.
Second of all, we applaud Metro’s acquisition of Première Moisson in 2014. Indeed, we
acknowledge the fact that Première Moisson is highly regarded for the quality of their products
and we think Metro will certainly benefit from the inclusion of their brand to its offering.
Première Moisson represents a good step towards providing a more high-end experience to
customers.
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. – FINANCIAL ANALYSIS
Third, we believe Metro’s differentiation from discount grocery stores may prove to be
beneficial. Indeed, obtaining good margins on certain products may produce significant
profitability and enable Metro to keep or even increase its profit margins.
Finally, we believe that management played their cards very well in their response to the entry
of Target on Québec’s market. Indeed, instead of simply confronting with aggressive marketing
strategy, they actually took an agreement with the international brand. In fact, each party
recognized the benefits of working together and entered into an arrangement where each
Target will include a Brunet Drugstore. That way, management turned Target popularity into an
opportunity instead of a significant treat.
Concerns
Minimum wage raised in Ontario
In January 2014, the government of Ontario announced the increase of its minimum wage from
$10.25 to $11 in order to support the Ontario’s Poverty Reduction Strategy. Moreover, the
government introduced a new legislation that will tie the future minimum wage rate to the CPI.
This new measure asks for an annually revised minimum rate. We certainly think Metro will be
affected by this new statute since more than 40 % of their stores are located in Ontario and
most of their employees are paid close to the minimum wage.
Increased competition
In June 2013, one of Metro’s strongest competitors, Empire, acquired Canada Safeway, a
grocery store chain based in Western Canada. In July 2014, Loblaw bought the well known
drugstore chain Shoppers Drugs Mart/Pharmaprix. These massive transactions bring
competition against Metro up a notch. For instance, Metro was part of a buying group that also
included Safeway. But Safeway left this buying group since they were acquired, hence lowering
the buying capability of the group as a whole and putting Metro at harm. Moreover, not only
Metro lost buying power but Loblaw and Empire actually increased theirs, emphasizing the
pressure on Metro. Investors expect Metro to follow its competitors and purchase a store chain
of its own. Management has not highlighted a precise target but rumor has it that Jean Coutu or
the grocer Overwaitea could be aimed at. That being said, the future acquisition may highly
influence Metro as a whole and we stay concerned with the possible risks related to the target
chosen.
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. – FINANCIAL ANALYSIS
Regulatory pressure effects on drugstore sales
The drugstore industry is governed by several regulatory requirements that are directly related
to the importance of store sales. Indeed, for now several years, government has been modifying
these rules in the sake of reducing healthcare expenses, but this also strongly impacts the
drugstore business. For instance, in 2011, the government of Québec lowered the maximum
rate of authorized professional allowance from 16.5% to 15%. In March 2011, the government
of Québec increased the maximum rate of wholesalers margin from 6.25% to 6,5%. In June
2013, the reimbursement rates for six large volume generic prescription drugs were reduced for
all Canadian provinces3. In the case of Metro, more than 30% of its business consists of
drugstores. We are concerned that future modifications of regulation may negatively affect
Metro’s overall sales.
Online grocery shopping
Online grocery shopping is becoming more and more popular. Indeed, several important players
such as Costco, Wal-Mart and Target put very strong emphasis on developing their website as
well as accustoming their client to shop online. On their website, consumers can order and
either get their products delivered at home or get their purchases prepared for pick up in store.
Once an order is made, it is very easy to reorder the same products afterward, so it facilitates
the purchase of ordinary items bought every week. Metro has also put forward the same efforts
into developing a convenient and easy to use website so that clients can as easily order products
from the comfort of their home. That said, keep in mind that a lot of consumers visit certain
grocery for matter of proximity and ease to shop. Indeed, a customer may visit Super C because
it is closer and easier to park its car compared with Wal-Mart or Costco that are less often
located close to neighborhoods. If this same customer is offered to get products delivered at
home, will he still choose to shop at Super C or will he consider Wal-Mart or Costco? Obviously,
product preferences and costs will lead the decision here, but that is not the point. The point is
that proximity and convenience, which we consider strength of neighborhood groceries, is put
out of the equation when it comes to online shopping. So that if a neighborhood grocery still
wants to keep its clients, massive emphasis must be put on prices and products quality. Also,
some groceries bet on store experience, atmosphere and customer service to reach clients. With
an increasing popularity of online shopping, these grocery stores may lose customers that will
3
Annual Report 2013, Jean Coutu
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. – FINANCIAL ANALYSIS
not consider these details anymore. We are concerned with development of online shopping for
the grocery industry as it allows an increased competition since it’s as easy to order from a store
as it is to order from another one. We think loyalty programs come to play an important role
here again. We advise investors to keep a careful eye on the importance that Metro grants to its
website as it may be as crucial as store experience.
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. – FINANCIAL ANALYSIS
Financial Analysis
In this section, we present our analysis of Metro’s financial position compared to six of its
competitors. More precisely, our analysis focuses on the variation of specific ratio from 2009 to
2014. Each company chosen is similar to Metro in terms of business activity. However, it is
important to understand that comparable companies are not perfectly similar. For instance,
Metro’s most important competitors are Empire and Loblaw, which are in direct competition
with the subject company. Costco is not facing Metro directly but actually competes against
Metro’s discount grocery store chains Super C and Food Basics. Similar conclusions can be
applied to Shopper Drugs Mart and Jean Coutu that faces Metro on the drugstore division.
Finally, The Kroger, which operates grocery stores on American ground do not compete with
Metro and is actually more mature than Metro. Keeping in mind those facts, we believe we can
extract a good understanding and sound conclusions from comparables analysis.
Profitability
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. – FINANCIAL ANALYSIS
In terms of profitability, Metro produced a return on asset (ROA) slightly higher than the peer
average. On the bright side, Metro’s ROA is significantly more important than its closest
competitors Empire and Loblaw. Moreover, we like the fact that its ROA was quite stable for the
studied period staying between 7.2% and 8%. Metro also produces a great return on equity
(ROE) averaging 18.5% on the period, which is superior to the peer average. The Dupont formula
allows us to understand that this return was the result of an increasing net profit margin. Once
again, Empire’s and Loblaw’s returns are significantly below the return of the subject company.
Margins
Notice how dominant is Metro’s net profit margin when analysed against its comparables. Also,
its net profit margin is significantly higher than the peer average. Furthermore, Metro has
managed to produce an increasing profit margin on the 6 year period. We believe Metro’s ability
to generate net profit is a good demonstration of the effectiveness of its management in
controlling cost and in developing a sound business model. Finally, note that we have adjusted
the net profit margin to exclude non recurrent items.
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. – FINANCIAL ANALYSIS
Activity Ratio
In terms of activity ratio, Metro’s performance is in line with peer average. For instance, Metro
produced a quite stable average total asset turnover of 2,3x compared to the peer average of
2,5x. We do not find this difference to be significant. In terms of fixed asset turnover, Metro
generated a performance above every other company. Metro’s account receivable turnover and
inventory turnover seem to be under control, producing a very stable performance on the
studied period.
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. - FINANCIAL ANALYSIS
Liquidity Ratio
The figure above illustrates a situation we are concerned about. Indeed, Metro’s short-term
liquidity seems to be on the thin side. For both the current ratio and the quick ratio, the
company performance is below the peer average. A current ratio of 1 is indeed something to be
concerned with. In fact, it shows that the current short-term liquidity would be just enough to
pay back short-term suppliers. That being said, we are encouraged by the fact that every other
company seems to be running low on liquidity which underlines that it may be a common
practice in this industry.
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. - FINANCIAL ANALYSIS
Solvency Ratio
This category of ratios shows how strong Metro’s balance sheet is. For instance, notice how
Metro has a lower total debt to equity and a higher interest coverage ratio than its closest
competitors Empire and Loblaw. Remember that Metro is expected to make important
acquisitions soon. These metrics show that this company would be more that able to handle
more debt and more interest expenses. Also, acknowledge the fact that Metro has a total
liability to total asset lower than the four companies operating into the food retailing industry,
reinforcing the point just mentioned.
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. - FINANCIAL ANALYSIS
Growth
A careful study of this figure allows us to underline Metro’s weak revenue growth. Indeed, this
metric started great in 2009 but went downhill from there. We are also concerned with the fact
that the average total revenue growth is below the peer average. Metro’s growth in net income
margin is in line with the peer average and represents a strength already mentioned. Indeed,
being able to increase net profit margin at a rate higher than the sales rate highlights effective
operations. However, keep in mind that this kind of growth is not sustainable in the future.
Indeed, growth in the net profit margin should converge with time toward total revenue growth.
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. - FINANCIAL ANALYSIS
Common Size Income Statement
In this figure, we are mostly interested by the EBIT margin sustained throughout the studied
period. We can see that Metro actually managed to increase its EBIT margin from 2009 to 2014.
Moreover, we can see that this margin was quite stable for the last three years.
Valuation
In this section, we will estimate Metro’s share value using both a relative and an absolute
valuation approach. Indeed, we are going to take advantage of Metro’s multiple comparables
and significant dividend payment history to price its share.
Relative Valuation Approach
Relative valuation allows us to appreciate the fact that Metro’s share seems to be priced in line
with the peer average. In order to conclude so, we first calculated the average P/E ratio of each
company for the 2009 to 2014 period. Then, we averaged all these metrics together to find the
peer average. The same procedure was followed to find the other multiples’ peer average. Note
that current trailing EPS was found by dividing the earnings excluding non-recurrent items by
the current number of shares outstanding. Finally, we calculated the estimated share price by
averaging the share price dictated by each metric.
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. - FINANCIAL ANALYSIS
Absolute Valuation Approach
In order to use the Dividend Discount Model, we needed to calculate the required rate of return
for Metro’s equity (Re). We did so by first calculating Metro’s 60 months Beta. We then adjusted
the raw Beta according to Blume’s adjustment in order to use it in our forecasted dividend
analysis. We found a Beta of 0,60. The historical 10 year Canadian government bond yield was
used to calculate the equity risk premium. With the CAPM formula, we found a required rate of
return of 4.83%. The figure presented above illustrates a summary of the calculation but note
that a detailed file is available on request.
We then analyzed the historical annual dividend payment of Metro and calculated the average
dividend growth for the last twelve years. From there, we forecasted future dividends based on
their historical growth. Indeed, we used a 14% growth rate for the first 5 years and 7% for the
year 2020 to 2024. Terminal value was found in applying a 1% perpetual growth rate to the 10 th
forecasted dividend. Summing the present value of each cash-flow allowed us to found a share
price of 72.92 $.
The target share price of $74.45 was found by averaging the estimated share price found by the
two approaches.
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. - FINANCIAL ANALYSIS
Conclusion
From our valuation, we can estimate Metro’s intrinsic value at around $74.45. At a price of $74
we thus believe Metro’s common shares are currently correctly priced. We advise investors to
keep a certain margin of safety and wait for a pull back in the mid-60’s area before considering
buying. We will keep monitoring development of possible acquisitions but for now, we consider
opportunities to be fully valued at this price level. Hence, we place a HOLD recommendation on
this security.
Disclosure

We do not own shares of Metro.

We did not receive any compensation from Metro in the last year nor do we expect to be
compensated in the next three months.
Philippe-Antoine Larue
September 23rd 2014
Metro Inc. - FINANCIAL ANALYSIS
Bibliography
http://www.canadiangrocer.com/top-stories/inside-metro-moi-11277
http://www.theglobeandmail.com/report-on-business/discount-wars-push-canadas-mid-pricedgrocery-stores-upscale/article18020510/
http://www.canadiangrocer.com/top-stories/metro-reorganizes-ontario-store-network-inresponse-to-intense-competition-30340
http://www.lapresse.ca/le-soleil/affaires/agro-alimentaire/201306/06/01-4658665-la-banniereprovigo-le-marche-a-quebec-dici-2014.php
http://business.financialpost.com/2013/06/13/safeways-5-8-billion-price-fit-were-right-forsobeys-analysts-say/
http://news.ontario.ca/opo/en/2014/01/ontario-increasing-minimum-wage.html
http://www.canadiangrocer.com/blog/online-grocery-is-arriving-are-you-prepared-43319
http://globalnews.ca/news/1128192/walmart-canada-makes-bigger-push-into-grocery-game/
Philippe-Antoine Larue
September 23rd 2014