Loblaw and Metro’s share prices have been rising much faster than their profits, leading to puzzling price-to-earnings ratios for stocks that tend to be prized for their reasonable valuations. People shop inside a Metro grocery store in Toronto, on July 18, 2023.Cole Burston/The Canadian Press
Canada’s largest grocery chains are performing the way you’d expect of mature businesses in the steady consumer staples sector: Their quarterly sales and profits are edging upward, and their retail footprints are expanding slowly.
If that sounds dull, their share prices are anything but: Loblaw Companies Ltd. L-T and Metro Inc. MRU-T are behaving more like disruptive tech stocks than the purveyors of milk and frozen pizzas, raising the question of how long this grocery boom can last.
So far in 2025, both stocks have rallied about 19 per cent, on average, outperforming the S&P/TSX Composite Index by 18 percentage points.
Over the past year, the two stocks have gained 51 per cent, including dividends, or nearly 34 percentage points more than the broad index.
Anyone who avoided the Magnificent Seven tech giants over either of these periods and instead dove headfirst into the food aisle is now laughing at their good fortune.
The problem: Loblaw and Metro’s share prices have been rising much faster than their profits, leading to puzzling price-to-earnings ratios for stocks that tend to be prized for their reasonable valuations.
Loblaw now trades at 33.2-times reported earnings, up from 22.4 last year, according to Bloomberg. Metro trades at 23.9-times reported earnings, up from 16.5 last year.
Some of this is understandable: In an era of erratic U.S. tariff policies and economic uncertainty, domestic grocers – which also operate pharmacies – look like a safe bet.
In the first quarter, the U.S. economy contracted by 0.3 per cent, at an annualized pace. Companies as diverse as General Motors Co. GM-N, JetBlue Airways Corp. JBLU-Q, United Parcel Service Inc. UPS-N, Procter & Gamble Co. PG-N and HSBC have issued warnings related to rising costs and a murkier outlook.
Some companies have even withdrawn financial guidance for this year, leaving investors and analysts guessing the outlook for profits and valuations.
But at large grocers, where essentials are sold under a number of different banners that can appeal to a range of budgets, the future appears far clearer.
“As we enter quarter two, we remain very confident in our 2025 outlook,” Per Bank, chief executive at Loblaw, said during a call with analysts this week.
This outlook includes generating earnings growth in the high single digits, repurchasing shares and investing $2.2-billion in stores and distribution centres.
If the future looks bright, the recent past looks pretty good as well.
Loblaw reported that its revenue increased 4.1 per cent in the first quarter, ended March 22, compared with the same period last year. Net earnings rose 9.6 per cent, suggesting that grocers were largely impervious to last year’s protests over food price inflation.
Two weeks ago, Metro also reported upbeat quarterly results that reinforce the predictable nature of the grocery business. Sales increased 5.5 per cent and adjusted earnings rose 12.1 per cent.
The mention of tariffs came with a positive spin: “In this uncertain economic environment, customers are favouring local and Canadian products,” Eric La Flèche, Metro’s chief executive officer, said during a call with analysts.
He’s referring to products such as locally grown apples and potatoes. But the comment could also apply to stocks, as investors retreat from U.S. assets in search of more attractive markets elsewhere.
And if economic clouds move in as tariffs bite and consumer confidence tanks, businesses that offer the essentials will stand out as solid plays.
“The market’s more recent thirst for defensiveness is a clear tailwind,” Mark Petrie, an analyst at CIBC Capital Markets, said in a research note on Loblaw this week.
But with the share prices of grocers soaring to stratospheric heights, the way forward for investors could be challenging if attention turns toward stretched valuations.
Even using upbeat estimated earnings for 2025 and 2026, Loblaw’s price-to-earnings ratio is in “uncharted territory,” according to John Zamparo, an analyst at Bank of Nova Scotia.
Grocers haven’t entered some sort of golden era. Canada’s population growth, which had been rising in recent years to levels unseen since the 1950s, is now slowing as Ottawa clamps down on immigration levels.
As well, grocers may have to navigate a rough economy, which is already pushing consumers to explore cheaper brands and discount grocery banners, where margins can be slimmer.
And lastly, the rush into defensive stocks – which includes utilities – won’t last forever. If investors look for better value among beaten-up economically sensitive names, interest in grocery stocks could subside.
Loblaw and Metro are among Canada’s top-performing stocks this year. Grocery demand might be a sure thing, but sky-high valuations are not.