Metro Inc.

Shareowner, Mar/Apr 2002

Stock to Study

Having an Appetite for Success

Cautions. Metro has grown its EPS considerably faster than its revenues for a long time. Despite the different rates, both have grown very consistently. With such stocks there is always the risk of a sharp drop in the multiple - and share price - arising from a surprising decline in either the company's revenue or EPS growth rates, or, in the general stock market.

To minimize this risk, prudent investors who might consider purchasing the stock should consider the merits of using a series of modest purchases spread out over several months, quarters and even years - rather than a single large purchase.

Canadian ShareOwner is solely responsible for all illustrative judgments made in this study.

Stock Split. Effective 12 February 2002, Metro split its stock on a twofor-one basis. All per-share data in this article bas been adjusted to reflect the split. Editor

Metro is a food retailer (e.g. supermarkets) with principal operations in Quebec and Ontario under the Metro, Super C, Marche Richelieu and Loeb banners. The company also operates the Quebec based Brunet and Clini-Plus drugstore chains.

Historical & Future Growth Prospects

Over the longer term, a stock's price only goes up 'a lot' if the company's revenues and earnings go up 'a lot.' So, let's start our study of the potential growth in Metro's share price by understanding the reasons for its historical revenue growth and the prospects for it continuing over at least the next five years.

The Numbers

As indicated by the accompanying historical Revenue Profile, since 1991 growth has averaged about 8% per year. During the last half of the study period, growth accelerated modestly to about 9%. After the first three months of fiscal 2002, revenue growth was 8% greater than the same period last year.

Important Products

Metro relies on two principal businesses to generate its revenue growth:

(1) Food Retailing & Wholesaling and,

(2) Pharmaceutical Franchising & Distribution.

Food Retailing & Wholesaling (93% of 2001 revenues vs. 94% in 1996)

The "Metro" chain of supermarkets operates in Quebec and focuses on providing consumers with a higher level of personal service than provided by competitors. Metro has the largest market share in its sector of the food retailing business.

In addition to traditional supermarket aisles, Metro stores contain specialized boutiques such as: the deli, the butcher, the bakery, the fish shop, the bulk food shop and prepared foods shops. Since 1996, the chain has been downsized from 298 stores to 253. However, today's stores are some 30% larger than in 1996 (20,400 square feet vs. 15,500 square feet).

The company's discount chain operates under the "Super C" banner in Quebec. This banner has the second largest share of its market sector.

Super C stores provide a wide range of products in "family sizes" at discount prices. Since 1996, the chain has increased the number of stores by 38% from 31 to 43; however, store size has remained unchanged at about 48,000 square feet.

The company operates a neighborhood retailing chain in Quebec under the "Marche Richelieu" banner. These 'mini supermarkets' cater to consumers seeking personalized service in a smaller, consumer-friendly format. Since 1996, the chain has been downsized from 211 stores to 155 while store size increased by approximately 20% from about 4,400 to 5,200 square feet. These stores have the leading market share in their sector of the market.

The company operates in the `convenience store market' with over 595 outlets carrying such banners as: "Marche AMI," "Gem," "Marche Extra," "SOS" and "Service."

In addition, Metro wholesales products to over 4,000 institutional customers such as hospitals, nursing homes, schools, hotels and restaurants.

In 1999, the company entered the Ontario market with the acquisition of the "Loeb" chain of supermarkets. The Loeb chain provides products and services similar to the company's "Metro" supermarkets in Quebec. Currently there are 39 Loeb stores averaging 26,500 square feet.

Metro has developed a variety of private label brands (e.g. "Merit Selection" and "Super C") for some 2,000 products to meet the needs of consumers who lead busy lifestyles. These brands are sold through the company's chains to retail and institutional customers.

Pharmaceutical Franchising & Distribution (7% vs. 6%)

Metro is a franchisor for the Quebec based "Brunet" and Clini-Plus pharmacy banners.

The Brunet chain operates mid-sized drugstores averaging about 4,500 square feet. The chain's 84 stores focus on promoting customer health and wellness. For example, Brunet was the first drugstore to stop selling tobacco products in 1986. In addition, stores offer one-day clinics on a variety of health and wellness topics.

The Clini-Plus chain operates neighborhood drug stores averaging about 1,500 square feet. In these stores, the pharmacist offers personalized service to a local clientele.

Important Competitors

The company's principal competitors include other food retailing banners such as: Loblaws, Maxi, IGA, and Provigo. The company also competes with `big box' entrants in the food retailing business like Wal-Mart and Costco.