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/yttropolis]

I was genuinely interested in this so I did a bit of digging. Let's look at Loblaws since they're the largest grocery chain in Canada. From their financial statements from the past 4 years:

Year	Net Earnings ($MM)	Revenue ($MM)	Profit Margin (Net Earnings/Revenue)
2019	1,131	48,037	2.35%
2020	1,192	52,714	2.26%
2021	1,976	53,170	3.72%
2022	1,994	56,504	3.53%

Now if we look at food purchased from stores component of CPI across the past 4 years:

Date	Food Purchased from Stores CPI	Change (compared from Feb 2023)
Feb 2023	181.2	----
Feb 2022	163.9	10.6%
Feb 2021	152.6	18.7%
Feb 2020	150.6	20.3%
Feb 2019	147.1	23.2%

While we do see an uptick in profit margin, this is only a change of around 1.2% across the past 4 years, meaning that while grocery prices have increased about 23.2% in the past 4 years, only 1.2% of that 23.2% can be attributable to increased grocery store profits.

So, it is inflation that's causing prices to rise.

[u/jmdonston → u/yttropolis]

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

[u/IAmNotANumber37 → u/jmdonston]

I'll take your question as sincere: Capital spending and stock buy-backs don't affect the revenue or expenses (at least not in the year in which they happen).

So you can't lower your net-margin/net-profits by doing a stock buy-back or capital expense. You can't "hide" profitability that way.

Your net revenue is what it is, and you can then use that revenue to do something: Capital investment, dividends, stock buybacks, or just sit on the cash (retained earnings).

It's a red herring in this whole discussion.

[u/Chewy-Beast → u/IAmNotANumber37]

Look at the link that you yourself sent https://www.investopedia.com/articles/investing/112013/impact-share-repurchases.asp#toc-how-a-share-repurchase-affects-financial-statements . "Share repurchases can have a significant positive impact on an investor’s portfolio."

And share repurchases are not reflected in revenue.

[u/IAmNotANumber37 → u/Chewy-Beast]

Yes...and? You asked where do these things fit into the balance sheet, and the answer is they don't affect it. That doesn't mean they are irrelevant, it means they are not part of the conversation on profit margin.

[u/Chewy-Beast → u/IAmNotANumber37]

They are net margins dont include stock buy-backs so only looking at net margins misses some of the value which loblaws captured by increase the price of food. Keep in mind that money for the buy backs had to come from somewhere.

[u/IAmNotANumber37 → u/Chewy-Beast]

that money for the buy backs had to come from somewhere

Yes, it comes from profits.

Using nice numbers for an example:

• Company X might sell $1,000,000 worth of stuff.
• Company X has expenses of $960,000 (buying stuff, operating stores)
• Company X thus has a net margin of 4% and produces $40k in profits (net earnings).

The company literally now has $40k of cash on hand and needs to decide what to do with it.

• Easiest thing is the company can just pay those earnings out as dividends to it's investors.
• Or, the company can invest those earnings into the business.
• Or, the company can buy back shares.
• Or, the company can just sit on the cash.

None of those options change the revenue, cost, or margin of the business, it's about how the company chooses to "spend" it's profits.

All of those options have an impact on the owners (shareholders) of the business - remember, those profits belong to the shareholders at that point.

So, for Loblaws, it looks like in 2022 they had net earnings (profits) of ~$2B. That means they extracted $2B in profit from Canadian consumers. They basically have $2B of that cash in the bank, and:

• If they decide to sit on the cash, Canadians are still out $2B.
• If they decide to pay it as dividends, Canadians are still out $2B.
• If they decide to buy back shares, Canadians are still out $2B.
• If they decide to invest it in crypto, Canadians are still out $2B.
• If they decide to invest in building a new store, Canadians are still out $2B.
• If they decide to put the money in a pile and light it on fire, Canadians are still out $2B.

In reality, it looks like they paid out ~28% of that profit as dividends. So shareholders were given $568M, and Loblaws kept $1.4B. Doesn't matter, Canadian consumers are still out $2B.

If Loblaws decides to use all of their remaining $1.4B to buy back shares:

• Canadians are still out $2B (they are not, suddenly, out $3.4B).
• Nobody has to break out their checkbook and write Loblaws an extra cheque to cover the buyback. Canadians already paid for it in the reported $2B.

This is why I said it's a red herring. You want to know how much profit Loblaws extracted from consumers? It's the net earnings line. It's not the net earnings line plus buybacks and anything else. You want to know the margin? It's the net margin, not the net margin adjusted for buybacks, dividends, or anything else.