Loblaw Companies’ (CA:L) April 14 announcement that it would invest $2 billion into its business in 2023 ought to be music to the ears of Canadian shoppers. But L stock investors met the news with a big “eh.”

The past two years of inflationary price increases have challenged a significant portion of the Canadian population. Grocery shoppers have focused their anger on the country’s five major grocery store chains, which account for 75% of Canada’s grocery sales.

However, those same two years have seen the Loblaw share price increase more than 82%, as the iShares MSCI Canada ETF (US:EWC) is down 1.2% in the same period.

Feeling Pinch

“We feel the pinch at the grocery store,” Michael von Massow, a food economy professor at the University of Guelph, told the CBC. “We’re looking for someone to blame and that’s who’s charging us more.”

Massow argues that Canada’s economies of scale due to its highly concentrated grocery store industry have likely helped keep prices lower than they would be if there were more competitors.

While Loblaw’s decision to invest $2 billion in its business is all about dollars and cents, Canadians deserve quality grocery stores regardless of where they live. This announcement helps do that.

Discount Moves

Loblaw will spend $2 billion in 2023 to open 38 new or relocated stores and convert or renovate 600 others. The company has 2,500 stores nationwide, renovating nearly 25% of its footprint in a year.

In addition, it plans to hire more than 6,000 people — a 3% increase — in several business areas, including retail, supply chain, technology, and construction.

“Highlights of Loblaw’s capital investments in 2023 include new discount-format supermarkets in underserved communities, an increase in pharmacist-led health clinics, hundreds of carbon reduction initiatives across its business, and continued development of a modern distribution centre in the Greater Toronto Area,” the company’s April 14 press release stated.

A closer look at the company’s spending plans suggests that its announcement isn’t nearly as groundbreaking as its announcement would indicate. In its 2022 annual report, it had already said its gross capital investments would be $2.1 billion, offset by $500 million in real estate dispositions, representing a net amount of $1.6 billion, on par with what it spent in 2021.

Cash Available

As the company stated in its Strategic Update and Outlook in its 2022 annual report, it expects to grow earnings faster than sales in 2023, with its adjusted net earnings per share growing in the low double digits. In addition, it plans to continue repurchasing its shares from the free cash flow generated in the year ahead.

In 2022, Loblaw generated $2.0 billion in free cash flow from its retail business, offset by $477 million in free cash flow used by its financial services unit, for the net free cash flow of $1.53 billion, down from $1.96 billion in 2021.

Its financial services’ higher free cash flow was caused “by growth in credit card receivables from an increase in the active customer base and a rise in customer spending, and lower cash earnings,” its 2022 annual report stated.

The critical thing to remember is that the free cash flow figure is after the capital investments have been paid for from cash flows from operating activities. For example, it repurchased $1.25 billion of its stock in 2022. That typically is paid for with excess cash that the business operations don’t need. Its 2022 share repurchases added 20 cents per share to earnings.

Long-time Loblaw shareholders know that it generates significant cash from its operations. In 2022, it was $4.76 billion. So it has more than plenty to spend on store renovations. Typically, retailers should renovate their stores every 5-7 years. That results in 14-20% of a retailer’s store fleet being refurbished annually. Loblaws will be upgrading 25% of its stores in 2023.

You might not like the higher prices, but you can’t say Loblaw’s isn’t keeping up with the times. If you’re a shopper, it ought to be music to your ears.

This article originally appeared on Fintel

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.