One of the best stock ideas for 2023 from our all-star roster of stock pickers is on a tear.
This is a well-known company that’s been around for more than 100 years and is born anew after taking advantage of COVID-19 to restructure under creditor protection.
A money management firm has done a deep dive on this name and its prospects.
And it has determined that, even after a nearly 3,000 per cent run for the shares, there is still ample runway for the stock to move higher.
That’s as the rest of the market catches on to the fact the company has multiple fundamental tailwinds in its favour and is much different and streamlined than the previous version.
by Donville Kent Asset Management
(RET:TSXV – Voting shares) (RET.A:TSXV – Non-voting shares)
Reitmans is a publicly-owned, family-controlled business that operates women’s apparel retail stores under the Reitmans, Penningtons, and RW & Co names.
Its stores are located in malls and retail power centers throughout Canada and offer affordable fashion to consumers.
The company has marketed under the slogans “Affordable, stylish fashions designed to fit everybody and every body”, and “Inspired by role models, not supermodels”.
The Reitmans banner, operating stores averaging 4,700 square feet (sq. ft.), is one of Canada’s largest women’s apparel specialty chains.
The Penningtons banner, is a leader in the Canadian plus-size market, offering trend-right style and affordable quality for plus-size fashion sizes 12-32.
Penningtons operates stores averaging 6,000 sq. ft. in power centres across Canada.
The RW&CO banner operates stores averaging 4,500 sq. ft. in premium locations in major shopping malls, catering to a customer with an urban mindset by offering fashions for men and women.
Reitmans’ valuation is the most compelling aspect of the story from an investment standpoint.
We believe the stock is as cheap as it is mainly due to the complexity and confusion of the Companies’ Creditor Arrangement Act (CCAA).
In addition, there is no analyst coverage, and many institutional investors cannot invest on the TSX Venture, especially not in something that’s currently this small (~$214m market cap).
From 2010-2019, the stock traded on an average price to cashflow of 7.7x, and we currently estimate it is trading on 2-2.5x cashflow.
Plus, the company is currently sitting on $68m of cash and no debt as of last quarter, and has about $240m of real estate assets.
Covid lockdowns proved to be a decisive moment for Reitmans.
Due to government forced store closures, Reitmans strategically entered CCAA protection and restructured their business.
They exited this process in 2022 after closing over 30% of their stores, consolidating their banners from five to three, laying off 1,600 employees, and paying 50 cents on the dollar to settle debt and liabilities.
- This process gave them cover, and a cheaper way to close unprofitable stores and renegotiate retail leases at an opportune time.
- We estimate they saved 10% on lease costs across their high-tier locations, and over 60% on their second-tier locations.
- Now the business carries $68m of cash, no debt, has reported Net Income of ~$60m in the last 12 months, owns roughly $240m of real estate in Montreal.
- Add in a quickly growing e- commerce segment, now representing 25% of sales, positive online search trends, increasing revenue per square foot, and decreasing cost per square foot, we think the profitability is sustainable.
- In past recessions, like 2001/2002 and 2008/2009, the business remained profitable, as they are a value brand, plus they are one of the few retailers with a growing customer base.
- We estimate their target market is growing 3.3% per year.
- We think the stock will see a massive re-rating in 2023 as it gets back onto investors’ radars and reinstates dividends & buybacks, plus gets a push to monetize real estate.
ONLINE SEARCH TRENDS
In order to gauge how well Reitmans has been performing relative to its competitors, we have examined the online Google search trends for Reitmans’ three banners compared to some of their competitors during the same timespan.
The trendline for Penningtons, for example, has been trending in a positive direction for a long time.
Reitmans launched their inaugural websites in 2007.
From fiscal 2015 to 2018 they disclosed e-commerce sales growth:
2015 – 63.5%
2016 – 69.1%
2017 – 50.7%
2018 – 38.2%
Part of the reason many of their financial metrics have been improving as of late is due to the success of their omni-channel strategy.
E-commerce sales now account for 25% of all sales.
Over the past few months, we have experimented with buying from each site, shipping to multiple locations, and returning items.
What we have found is a top tier online experience.
BUYBACKS AND DIVIDENDS
Reitmans’ management has a propensity for buybacks and dividends, and we believe this trend, plus their current cash levels and valuation, set up an ideal scenario for the company to renew their buyback and dividend policies.
However, we expect management to be conservative in the short-term considering the macro environment.
When asked about capital allocation, management has stated they are focused on profitability at the moment.
In the past, the company’s stated objective was to payout 50-80% of sustainable earnings per share.
Considering the amount of free cash generation, cash on the balance sheet will build quickly.
Considering the current valuation, stock buybacks are extremely accretive for shareholders, and we expect management will continue to be pushed into initiating a buyback program.
With the company exiting their Covid issues with a much cleaner balance sheet and streamlined operations, the profitability metrics have improved considerably.
The growth of their e-commerce business and past store rationalizations have helped improve their profitability metrics for over a decade.
As shown below, using square foot estimates, revenue per location and revenue per square foot (not adjusted for online sales), has been steadily improving.
- Reitmans is one of the only retailers with favourable demographics.
- With a focus on mature women, with specific banners and brands servicing plus size women, we estimate their target population is growing 3.3% per year.
Input Costs – The main input cost for Reitmans is the cost of cotton.
The price of cotton spike at the beginning of 2022 but has since dropped 46% from the highs in May.
The current price is back to 2018 levels and we see this is as a positive for gross margins for calendar 2023.
Covid, CCAA proceedings and the current economic environment have created the current opportunity in Reitmans stock.
With the business now streamlined and focused on profitability, we think the stock will trade back to a regular multiple.
We believe there is enough upside to invest strictly based on the retail operating business.
That being said, there is a significant opportunity to monetize the balance sheet which limits the overall downside at these prices.
Full January ROE Reporter article by Donville Kent.