Canadian Tire Corporation Limited

Canadian Tire Corporation Limited (TSX: CTC.A) is a Canadian company with a portfolio of businesses, which include Retail division, CT REIT and a Financial services segment. It was founded in 1992, and currently, it has more than 1,740 outlets.

Due to the ongoing pandemic, the company is withdrawing its previously disclosed FY20 capital expenditure guidance.

First quarter FY20 Financial Highlights: The group announced its quarterly results, wherein the company reported a 1.6% dip in revenue to CAD 2,848.3 million. The decline was primarily attributed to temporary store closures at SportChek and Mark’s banners, which was partially offset by higher shipments at Canadian Tire coupled with growth from the Financial Services segment. Gross margin in dollars reduced to CAD 939.2 million, as compared to CAD 998.3 million in the previous corresponding quarter. Income before income taxes shrank to CAD 2.9 million from CAD 123.4 million in pcp, primarily attributed to lower gross margin, a higher selling and administrative expenses and a marginally higher net finance cost. The   Surge in selling and administrative expenses was due to a net mark-to-market adjustment amounting to CAD 41.8 million on the company’s equity hedges related to share-based compensation awards. The company reported its net income at CAD 12.2 million, as compared to CAD 97.4 million in Q1FY20. The company reported total capital expenditure of CAD 114.3 million, higher than CAD 106.9 million in pcp, primarily allocated to Real estate and Information technology.

Q1FY20 income Statement Highlights (Source: Company Reports)

Valuation Methodology: P/E Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock corrected ~16% so far this year. Despite the unprecedented impacts of COVID-19 on consumer activity, Canadian Tire Retail (CTR) delivered 0.7% comparable-store growth on y-o-y basis. The Company reduced its working hours, which resulted in lower-traffic, while the customers' focus was primarily on essential items. Meanwhile, the quarter witnessed strong demand from the on-line segment, and the momentum is expected to continue in the coming quarters. The group's eCommerce sales grew 44% in the quarter, led by close to 80% growth at CTR stores. The Company is focusing on operational efficiencies remains on track to deliver its targeted CAD 200 million annualized cost savings by 2022. The group is focusing on liquidity preservation and enhanced its credit facility by CAD 650 million and suspended its share repurchase program in order to sail through the current challenging environment. The stock witnessed a pullback rally and jumped ~9% in the last one month. We have valued the stock using P/E based relative valuation approach and considered industry (diversified retail) median on NTM basis and arrived at a target price offering lower double-digit upside potential (in % terms).  Hence, we recommend a 'Buy' on the stock at the current market price of CAD 117.1 as on June 11, 2020.

CTC.A Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Dollarama Inc.

Dollarama Inc. (TSX: DOL) is a Canada-based retail stores operator. The Company offers a wide range of everyday consumer products, general merchandise, and seasonal items, with merchandise etc. The Group derives the majority of the income from General merchandise and consumer products. During the end of the quarter, the Group reported 1,301 number of stores under its umbrella, including the addition of 10 new stores.

The Management declared a quarterly cash dividend for of CAD 0.044 per common share, payable on August 7, 2020.

Q1FY20 Financial Highlights: DOL announced its quarterly results, wherein the Company reported 2% y-o-y growth in its revenue to CAD 844.8 million. The increase was driven by contribution from the recently added stores coupled with comparable-store sales growth. The quarter was marked by higher demand from consumables including household and cleaning products, health and hygiene essentials and food products while lower in-store traffic along with a fall in demand for specific products items remained a drag. The Company reported a higher gross profit of CAD 349.05 million, as compared to CAD 348.89 million in pcp, despite a higher cost of sales, thanks to the improved income. Operating income slumped to CAD 149.71 million against CAD 168.57 million due to a surge in general, administrative & store operating expenses coupled with higher depreciation & amortization. Net earnings shrank to CAD 86.08 million from CAD 103.51 million in the previous corresponding quarter due to a lower operating income and an elevated financing cost.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: P/E Based Relative Valuation (Illustrative)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of DOL appreciated ~12% in the last one year, amidst a sharp correction in the broader market. Despite some stores (~104 stores) were temporarily closed due to COVID 19 pandemic, the Group managed to report an improved topline, which is positive. The Company is focusing on expanding its topline and as well as its sustaining its profitability and margins in the coming years through lowering its input costs. The Company has expanded its presence through the online segment and added more than 1,000 products underneath, which augers well to cater a large customer base. The group mentioned that a gradual restart of economic activities is taking place in most markets in which it operates, and stores that were temporarily closed are either reopened or preparing for a reopening.  Investors should note that the stock was trading above 200-days simple moving average of CAD 44.71, which is positive. The offering of DOL is correlated with the consumption pattern of the population and categorized ‘essential’, which are immune to the economic cycles. We have valued the stock using P/E based relative valuation method and have arrived at a target upside of high single digit (in percentage terms). For the said purposes, we have considered peers like Canopy Metro Inc (TSX: MRU), Alimentation Couche-Tard Inc (TSX: ATDb) Saputo Inc (TSX: SAP) etc., to name a few as a peer group. Hence, we recommend a ‘Watch’ on the stock at the closing price of CAD 46.98 on June 11, 2020 and look for the better entry point.

DOL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.