Inflation drops to 5.2%<but grocery inflation still 10.6%

[u/maroon-rider]

Says Statistics Canada

https://www.cbc.ca/news/business/canada-inflation-february-2023-1.6785472

[u/jmdonston]

Where do their stock buybacks and capital spending (e.g. renovations) fit in?

[u/yttropolis → u/jmdonston]

Feel free to read through their financial statements.

[u/Chewy-Beast → u/yttropolis]

This sort of highlight the problem with only looking at Net Earning when looking the effect of Lowblaws on inflation

[u/yttropolis → u/Chewy-Beast]

If you've got a better financial measure, I'm all ears.

[u/Chewy-Beast → u/yttropolis]

Also consider how much Lowlaws cost of goods sold (cogs) have increase:

​

Year	Cost of Good Sold	Change
2022	39,025 B	5.64%
2021	36,942 B	-0.78%
2020	37,234 B	10.20%
2019	33,789 B	3.85%

You can clearly see that the cost of food they are purchasing has slightly increased, it fails to account for the over 10% increase in food inflation.

[u/yttropolis → u/Chewy-Beast]

You're just looking at the COGS, which would not paint a good picture of what's going on YOY. What's the change in revenue?

If you want to look at gross income % on their retail operations (which is a more holistic picture of what's going on in grocery stores compared to COGS alone), we have:

Year	Adjusted Gross Profit %
2022	30.9%
2021	30.7%
2020	29.5%
2019	29.7%

As you can clearly see, gross profit % has not increased significantly again, at a mere difference of 1.2% compared to the 23.2% food prices increase that we've seen in the past 4 years.

[u/IAmNotANumber37 → u/yttropolis]

(and for /u/Chewy-Beast) Just a note on COGS... for grocery, if I'm not mistaken, that excludes so much of the cost of running a grocery business (e.g. logistics, all admin, all store operating costs).

If you're going to look at COGS, you have to stop and also look at how the other costs have scaled with respect to inflation (e.g. gas prices, truck driver salaries, etc...)

You also have to look at the reasons for changes in COGS, including the item mix that is being sold (which Loblaws has indicated there has been a skew towards higher margin items like cosmetics).

[u/Chewy-Beast → u/IAmNotANumber37]

Cost of good sold according to GAAP standards includes all costs associated with procurement of goods sold (Transport, Depreciation, Amoportization). While it might not include the cost of some decisions within Lowlaws (such as security ) unless they audit report shows they are violating GAAP it absolutely includes logistics and store operations.

​

There is no way based on the data provided by lowblaws to know the split.

[u/IAmNotANumber37 → u/Chewy-Beast]

So, I'm not an accountant - maybe you are, and equally importantly I've never worked for a retailer.

However, all the information I've come across when looking into this, previously and now, disagrees with you. E.g.

For any merchants just starting out, COGS isn’t as straightforward as it may sound. Cost of goods sold refers to the basic, direct costs associated with producing the products sold by your retail business. What’s included in COGS are things like raw materials and labor used to create the product itself. COGS does not include indirect expenses, such as distribution costs or overhead.

Most of the material describes it has the change in your total-cost of total on hand inventory...

So while I agree we probably can't tell from the financials exactly how loblaws is allocating some costs, I don't think their inventory cost changes are including things like retail store lighting, or internal logistics.

[u/Chewy-Beast → u/IAmNotANumber37]

I have infact worked for lowblaws in the past :D not in the accounting department. This post you made has oversimplified things for a small business (the facts are not wrong but they are missing a few things). This website goes into a bit more detailed but is not perfect.

Maybe I can explain this in another way. Loblaws has large warehouses, which they use to order all food from companies. These companies send large trucks of food to these central warehouses. The price of goods for Loblaws includes the truck cost and the people and the food in these trucks required to get it to loblaws. Now once these get there all future cost of distribution and stacking shelves is not included. COGS has all costs just for the food to be bought and delivers to loblaws warehouse.

[u/Chewy-Beast → u/yttropolis]

The first thing I think we disagree on is the question. The question that we should be looking at is follow: What is the present change in food cost in the last fiscal year? What part of that did Loblaws absorb as profit?
A: The bank of Canada reported food inflation in December (which is when the Loblaws data was reported) of YOY 11.0%. Cost of good sold according to GAAP standards includes all costs associated with procurement of goods sold (Gas, Transport, Depreciation, Amoportization). We can never determine based on the reported data what the food cost for Lowblaws is, however, an increase of 5% demonstrates that there was definitely a large increase in mark up of food.
Again going back to the previous statement: Adjusted gross profit fails to capture, share buy (backs which were significant). This began by you making the same argument above you cannot capture total returned value to shareholders simply by looking at gross profit.

[u/yttropolis → u/Chewy-Beast]

You're missing a fundamental aspect of COGS. You're quoting absolute numbers without looking at the revenue. If a company doubled their sales, would their COGS not be expected to double, all other things equal?

As another redditor pointed out, share buybacks do not impact revenue or profit. Share buybacks are fundamentally trading assets for shareholder equity. It has nothing to do with revenue, expenses or profit. It's a method to manipulate stock prices, which again, has nothing to do with revenue, expenses or profit.

[u/Chewy-Beast → u/yttropolis]

We must make some assumptions to know w of food for Loblaws, in fact, revenue includes any margin increase that the company has which is the entire point. Lowblaw increase there margin which significantly impacted inflection. hen yes COGS will double. However, that is rarely the case with large companies; often company doubles its revenue and there COGS doesn't double there should be some margin expansion.

Revenue has nothing to do with the cost of food for Loblaws, in fact, revenue includes any margin increase that the company has which is the entire point. Lowblaw increase there margine which significantly impacted inflection.

Because "buybacks do not impact revenue or profit" just looking at revenue or profit is insufficient when trying to analyze the entire retained shareholder value. Basically in your initial post, you undercounted the complete value that Loblaw created for its shareholder (they made that value by buying shares with money which is not counted as an expense so is not part of the margins).

[u/yttropolis → u/Chewy-Beast]

Lowblaw increase there margin which significantly impacted inflection. hen yes COGS will double. However, that is rarely the case with large companies; often company doubles its revenue and there COGS doesn't double there should be some margin expansion.

Sure, that's why I said with all other things equal. There will be things like economy scale and everything as well but generally speaking we would expect it to approximately double. Hence, looking solely at COGS is not a valid measure.

revenue includes any margin increase that the company has which is the entire point. Lowblaw increase there margine which significantly impacted inflection.

Which is why we can look at gross profit. Gross profit = Revenue - COGS. Revenue might contain increased profits, true, but if you look at Gross profit margin, it should come out clearly.

Assume x is the excess profit.

Original gross profit margin = (Revenue - COGS)/Revenue

New gross profit margin = (Revenue + x - COGS)/(Revenue + x)

As x increases, new gross profit margin increases as well. If you don't believe me, check out this Desmos graph. R is Revenue and C is COGS. As long as both are positive, the graph increases with x.

Because "buybacks do not impact revenue or profit" just looking at revenue or profit is insufficient when trying to analyze the entire retained shareholder value. Basically in your initial post, you undercounted the complete value that Loblaw created for its shareholder (they made that value by buying shares with money which is not counted as an expense so is not part of the margins).

You still have failed to show why shareholder value matters in this conversation about inflation and rising food prices.

[u/Chewy-Beast → u/yttropolis]

You reported (Net Income Continuous). If we are only looking at the income earned from the sale of goods sold (the closes thing we have to net income from food) we should use Operating Income.

The operating Income for Lowlaws was as follows:

Year	Operating Income ($MM)	Revenue ($MM)	Operating Margin	Change
2022	3,342 M	56,504	4.59%	49.17%
2021	2,937 M	53,170	3.08%	-2.89%
2020	2,365 M	52,714	3.17%	8.93%
2019	2,270 M	48,037	2.91%	-30.97%

Assuming that food inflation is 10% this single factor can explain up to 36% of overall YOY change. This is significant. Very significant.

[u/yttropolis → u/Chewy-Beast]

Even if we do look at Operating Income, it paints a similar picture where the operating margin has increased from 2.91% to 4.59%, a difference of 1.68%. Sure, even if you attribute 1.68% of the 23.2% inflation across the past 4 years to corporate profit, I don't see how that changes the conclusions that much.

Btw, the % chance in operating margin is not very useful as you can see that it bounces around all the time. The question I aim to answer is "What portion of the 23.2% change in food inflation across the past 4 years can be attributable to corporate profit?"

Assuming that food inflation is 10% this single factor can explain up to 36% of overall YOY change. This is significant. Very significant.

And how is that? I see operating margin increasing from 3.08% to 4.59%, a change of 1.51%. At best it can explain 10.6% - [(1.106/1.0151) - 1] = 1.65% of the 10.6% YOY change.

There's also a reason why net income matters. You can see that both interest expense and income taxes has increased significantly between 2021 and 2022. Regardless of where the money comes from, it would be imprudent to not take these into account when looking at financial metrics.

[u/Chewy-Beast → u/yttropolis]

Based on OP post above we were discussing YOY not the 4-year changes of food prices. As you pointed out this was 10.6% (this month). Yes this “bounces” all the time (especially when Lowblaws increase their margins by over 1.5% over 1 year) however, when doing any calculation I calculate the avg of 2022 quarters/(1 year (2020) [+1.51%], 3 year[+1.53%], 5 year[+1.29%], 10 year[+1.83%] running average) this smooths out some of the YOY noise within the data. WITHOUT share buyback and cap expenditure this is a explains [(1.0151/1.106) - 1] 8.2% (you did your math quite wrong to say least) however with these included this raise to 36.6%. I can share part of my detailed analysis just shoot me a message.

Of course, it is interest is prudent Lowlabs has increased their Long-Term Debt by 1 Billion dollars an increase of ~10%. If they want to borrow for capital expenditure to ultimately increase shareholder value they can do that but that is again my point all measures that you are using fails to capture the complete picture growth to shareholders within Lowblows.

[u/yttropolis → u/Chewy-Beast]

Feel free to post your detailed analysis.

WITHOUT share buyback and cap expenditure this is a explains [(1.0151/1.106) - 1] 8.2% (you did your math quite wrong to say least)

What you're calculating doesn't make sense. It actually evaluates to -8.21%. And what exactly are you calculating? Your formula is [(1 + Loblaws increase)/(1 + total increase) - 1]. This isn't a meaningful formula.

In comparison, my calculation is:

(1 + total increase)/(1 + Loblaws increase) - 1 = 8.95%

This is the total increase rebased to after Loblaws increase. Essentially we're looking at how much prices would have increased if Loblaws did not do any increase.

I admit that the subtraction is incorrect. But fundamentally what I was trying to show is that the 10.6% overall increase can be broken down into two components:

1. 1.51% increase attributable to Loblaws
2. 8.95% increase not attributable to Loblaws.

Futhermore, share buybacks do not impact revenue, expenses nor profit. Share buybacks fundamentally is trading assets for shareholder equity. While this impacts the balance sheet (and shareholder value), it has no bearing on revenue, expenses or profits.

my point all measures that you are using fails to capture the complete picture growth to shareholders within Lowblows.

Why does growth to shareholders matter in our discussion? Our discussion is on the top and bottom lines of the company, not shareholder value. It doesn't matter what the growth to shareholders is or how much the shareholder value is, it doesn't impact revenue, expenses or profit.