George Weston's Q1 Earnings Reveal Growth, But Valuation Risks Linger

George Weston Limited (TSX: WN.TO) delivered a mixed first-quarter performance, with adjusted diluted net earnings per common share rising 12.2% year-over-year to $1.80, but actual net income before adjustments fell to $0.43 per share due to non-recurring costs. The results highlight the company’s ability to navigate challenges through strategic moves, particularly in its Loblaw and Choice Properties REIT segments. However, valuation concerns and lingering uncertainties about recurring costs suggest investors should proceed with caution.

Key Takeaways from Q1 2025:

1. Adjusted Earnings Growth: The 12.2% jump in adjusted diluted EPS reflects operational improvements, though the figure trails the consensus estimate of $2.77. Management cited cost optimizations and strong performance from Loblaw’s retail operations as key drivers.

2. Loblaw’s Resilience: The company’s flagship grocery division, Loblaw, posted steady results, supported by its dominant market position and strategic real estate partnerships. For instance, Choice Properties REIT acquired a $182.3 million Loblaw distribution center in Ajax, Ontario, post-quarter, which was immediately leased back to Loblaw. This transaction underscores the symbiotic relationship between the two entities, with Choice Properties deepening its portfolio of income-generating assets tied to Loblaw’s operations.

3. Choice Properties: Strategic Moves Pay Off: The REIT segment shored up its position through two major Q1 transactions:

4. A $33.7 million acquisition of a Brampton, Ontario retail property occupied by a Fortinos supermarket (a Loblaw subsidiary), which was also leased back.
5. An $158 million purchase of eight industrial storage sites, enhancing its logistics capabilities.
6. The strategic alliance with Loblaw, extended to 2033, ensures priority access to Loblaw’s property sales, locking in long-term leases and reducing tenant turnover risks.

Analysts and the Market: A Cautionary Tone

Despite the operational positives, the stock’s performance has been uneven. While the Q1 results pushed shares up 2.8% on the day of the announcement, the stock remains pressured by valuation concerns. GuruFocus estimates a 1-year target of $215.05—a 19% discount to its current price of $266.78—while analyst price targets average $260.33, suggesting limited upside.

The company’s dividend remains a positive sign, with the latest payout of $0.82 per share reflecting financial stability. However, the full-year 2025 revenue estimate was raised to $65.34 billion, while EPS guidance was trimmed slightly to $12.02, signaling cautious expectations.

Risks on the Horizon

• Recurring Costs: The $1.80 adjusted EPS excludes non-recurring expenses, which totaled $1.37 per share. If these costs become persistent—due to supply chain disruptions or inflation—profitability could suffer.
• Valuation Disconnect: The stock’s premium valuation contrasts with GuruFocus’s bearish view, raising questions about whether investors are overpaying for growth.
• Dependence on Loblaw: Over 90% of Choice Properties’ revenue comes from Loblaw leases. While this provides stability, it also amplifies risk if Loblaw’s performance falters.

Conclusion: A Stock for the Optimistic

George Weston’s Q1 results are a reminder of its operational strengths, particularly its ability to capitalize on synergies between Loblaw and Choice Properties. The strategic moves in real estate and logistics are smart plays to lock in long-term income streams, and the 12.2% EPS growth is a positive sign. However, investors must weigh this against the stock’s elevated valuation and execution risks.

The stock’s current price of $266.78 is near its 52-week high, but with GuruFocus projecting a 19% drop over the next year, there’s a clear divergence between short-term optimism and longer-term skepticism. For bulls, the company’s dividend, stable tenant relationships, and balance sheet strength are compelling. For bears, the reliance on Loblaw and the unresolved question of recurring costs are red flags.

In the end, George Weston remains a core holding for those betting on Canada’s grocery and real estate sectors—provided investors are willing to accept the risks of a stock that’s already delivered much of its potential upside.