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Andrew Bell

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It wasn't meant to last

Andrew Bell

TORONTO (GlobeinvestorGOLD) — Hard to know what the worst part is, really. The way her eyes avoid yours, the long stilted monologue about how it really has nothing to do with your woolen underwear and plumbing problem… and then, ah, then, the red card. Let's stay friends. And you're on the market again, so to speak. Not exactly front-window stuff, though, let's face it. It's more like you've been thrown onto a broken skid at the back.

Now, high-flying retail stocks have a habit of producing their own heart wrenches, the kind that leave investors jabbering by themselves in the corner. Take Marks and Spencer PLC, whose stock dropped 70 per cent from 1997 to 2000 when even English people decided it was too dull for them. Or Gap Inc., whose shares fell 50 per cent between mid-1999 and late 2000 as zombie-like U.S. shoppers were confused by the plethora of weird purple tops.

So here's a couple of expensively-priced retail yarns that may be due to for a wrench downward, becoming a tale of amusing and hilarious losses for investors who wait around for the giant, grabbing, drooling monkey to appear; the one with name scrawled crudely onto the collar around its jowly neck. What does it say? Oh, "lower price-earnings ratio."

No no, get away, you beast. Not now, anyway.

Let's look at Loblaw Cos. first. Galen Weston's asparagus stand always has a high valuation — and it apparently just keeps going up. By the end of January, the shares were ahead 72 per cent over five years versus 28 per cent for the S&P/TSX composite index. BMO Nesbitt Burns analyst Karim Salamation says Loblaw's price-earnings ratio over 10 years has been a hefty 21 times. But in a December report he calculated the stock, then $63.50, was trading at less than 18 times estimated 2004 profits and only 15 times earnings in 2005. (The shares have risen $4 or so since.)

Monstrous proportions

But 2005 is, uh, a year away — and look, if that isn't old Godzilla crushing buildings and ripping the heads off telemarketing executives. Hey, keep going on that last one, green scaly violent dude! Actually, it isn't a lovable and ironic Japanese dinosaur smashing the landscape. And sorry, the junk-phone-call fellows are still alive, able to talk and breathe properly without bubbling.

That was all just a silly metaphor for Wal-Mart Stores Inc., which is turning the U.S. supermarket industry into ground beef. As of late 2003, the dark empire said it had no plans to bring its supercentre food stores into Canada. But any scare along those lines will be as popular among Loblaw shareholders as a slippery spill in aisle 4. Whoops, over you go… Ha ha ha!

Just ask starved, mumbling investors in Albertson's Inc., down 59 per cent in five years, Safeway Inc., down 58 per cent, or Kroger Co., down 34 per cent; all U.S. grocery chains eaten alive by the abominable thing from Arkansas. (Oh, and Canadian investors get to add another 7 percentage points to those losses to account for the slide in the American peso.)

Never pay for your groceries, by the way. Just shout at the checkout serf to carry those bags to the car quickly and to quit with the whining. Immediately, mind you, and bring all of them at once!

Cornered by corner stores?

Then there's the stumble home at 2:00 a.m., brain shamefully numbed by the poison du jour. How comforting to find yourself in a decently lit and tidy convenience store and the succour of cigs 'n' caffeine! And perhaps a sweet tankard o' Froster, the icy sluicedown from Quebec corner-store empire Alimentation Couche Tarde Inc. It's a challenge to the galactically famous Slurpee from 7-Eleven Corp.

Couche-Tarde keeps doubling its size by acquisition. It now owns 4,700 stores, almost two-thirds of them south of the border, to rank as the fourth-largest U.S. convenience chain. The company's Quebec laissez faire style makes its regimented U.S. rivals look numb. Couche-Tarde stores are encouraged to adopt their own personality. So one outlet in Calgary features giant industrial spouts of Froster for wretched teens while another store nearby attracts shuffling vacant oldsters in their 20s and older with coffee and places to read. The "strategy differs radically from the traditional cookie-cutter approach adopted by other chains," the New York Times marveled in October.

Analysts chirp that profits are set to climb 33 per cent during the company's current year, topping $1 a share in the 12 months ending in April. And earnings are expected to rise 50 per cent next year. As of mid-January, with the stock at $24, the shares were up more than 370 per cent over five years.

So what could go wrong? Well, plenty already has for the U.S. convenience store industry as a whole.

What can go wrong might

"More and more chains face refinancings and bankruptcies… ," Investment Dealers Digest intoned last spring. "There are too many, and most of them are overleveraged." Seems the industry's bright lights worked out that grubby little retail chains would have to close when tough new rules about leaky underground gasoline tanks were slapped on by fleece-toting, granola-chewing officials. But the small chains survived on a flood of cash from drooling private investors, leaving America with one-third too many places to rob.

Okay, so Couche-Tarde has an okay balance sheet and, perhaps, a new way of running convenience stores. But big grocers such as Wal-Mart are opening up gas pumps. Rising taxes don't make selling cigarettes much fun either. Desjardins Securities called the stock a Top Pick in November, arguing that investors should get all warm and tingly when they consider the company's good results "given the challenging environment in two of its major categories, gasoline and tobacco."

Couche-Tarde sounds like a great company and might be bargain at a multiple of more than 20 times this year's earnings. But the combination of an over-crowded industry and nasty pressure on sales and margins in two big product lines — plus invigorating currency losses if the Yankee drachma wipes out again — could well produce a visit from a certain greasy impertinent simian, all matted hair and lewd gestures.

Andrew Bell was an investment reporter and editor with The Globe and Mail for 12 years prior to joining Report on Business Television in 2001.

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