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A Loblaws location in Toronto, on May 2, 2013.

Aaron Vincent Elkaim/The Canadian Press

Among the laggards of the pandemic, Canadian grocery stocks are perhaps the most surprising.

Last March, when explosive demand saw panicked shoppers strip supermarket shelves bare, few would have predicted the big chains would be among the absolute worst-performing Canadian stocks 10 months later.

But there they are, in the basement of the Toronto Stock Exchange, nestled among the real estate investment trusts and sad-sack resource names.

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Since the market hit bottom on March 23, in fact, Loblaw Cos. Ltd. is the third-worst performing stock in the S&P/TSX Composite Index, with a return of 6.6 per cent. The benchmark index over that time realized a 60-per-cent gain.

The surge in sales and profits enjoyed by grocery chains in the early months of the pandemic has given way to more modest growth recently. Part of the pressure on the bottom line of late lies with costs related to the pandemic, such as personal protective equipment for staff, higher labour expenses and enhanced store cleaning.

Meanwhile, the preferences of investors in general shifted aggressively away from defensive sectors and value stocks pretty early on in the first wave of the pandemic.

“Once the market started looking further forward and got more optimistic about recovery, [grocery stocks] became more of a source of cash,” said Teal Linde, president of Linde Equity, a Vancouver-based investment advisory.

“Now with vaccines in play, the investment opportunity in grocery stores, I think, has passed us.”

There’s still an elevated level of demand for groceries, particularly amid renewed stay-at-home orders and restaurant closings that coincide with a second wave of COVID-19 infections in many parts of Canada.

But it’s not quite the frenzy it was last winter, when stockpiling by consumers generated a sales boost of $751-million for Loblaw over a period of just three weeks. In its most recent quarter, the company reported an increase in revenues of just over $1-billion, or 6.9 per cent, over the same 16-week period in 2019.

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Adjusted third-quarter earnings before interest, taxes, depreciation and amortization, on the other hand, rose by just 2.1 per cent. A gap between sales growth and earnings growth is likely to persist, Loblaw executive chairman Galen Weston said in a call with analysts in November.

“I think that while we have these COVID costs, and I don’t see a reason that they’re going to go away, it’s a reasonable assumption that you’re just not going to get the flow-through,” Mr. Weston said.

Upward pressure on costs is an indefinite reality for all the major chains. In its most recent quarterly earnings call, Sobeys parent Empire Co. Ltd. said it expects to incur an extra $15-million to $20-million per quarter in COVID-19 related costs, including bonuses for employees in regions under lockdown. Metro Inc., meanwhile, reported $27-million of added expenses related to the pandemic in its latest quarter.

“The margins are thin enough, that anything incremental really impacts the bottom line,” said Christine Poole, chief executive officer at GlobeInvest Capital Management, which holds shares of Loblaw.

“And all these companies have had to advance their digital strategies and grocery delivery, so they’ve all been investing in that.”

The pandemic has accelerated the shift to e-commerce in Canada, which has generally been slow to move away from brick-and-mortar retail, particularly in food retail – online grocery made up only 4.2 per cent of total food sales from stores in 2019, according to a report by ATB Capital Markets.

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But a recent report by the Dalhousie University Agri-Food Analytics Lab found that nearly one-third of Canadians have used curbside pickup or home delivery services from grocers over the six months up to mid-November.

The only Canadian grocer to currently rank in the top 10 online retailers by sales in Canada is Loblaw, according to the ATB report. Both Metro and Empire have been investing heavily in recent months to expand their home delivery offerings.

Heightened competition for the online grocery market could put downward pressure on margins, even postpandemic. “The Canadian grocery market remains highly competitive, and grocers need to be mindful of the consumer’s ability to trade down or away if prices increase materially,” Scotia Capital analyst Patricia Baker said in a recent note.

Those earnings dynamics have not enamoured investors to the Canadian grocery chains.

The 10 worst performers in the S&P/TSX Composite Index since last March’s low point include not just Loblaw, but also George Weston Ltd., which is a majority owner of Loblaw, as well as Metro, both of which trail the S&P/TSX by roughly 50 percentage points. While Empire Co. Ltd. has fared much better, posting a 45-per-cent gain over that time, that still ranks in the bottom third of the market.

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