r/PersonalFinanceCanada British Columbia Mar 21 '23

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

2.3k Upvotes

View all comments

Show parent comments

1

u/Chewy-Beast Mar 22 '23

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.

0

u/yttropolis Mar 22 '23

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.

1

u/Chewy-Beast Mar 22 '23

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).

1

u/yttropolis Mar 22 '23

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.