North West Company Inc

North West Company Inc (TSX: NWC), is a Canada-based company which is principally engaged in retail business in underserved rural communities and urban neighborhoods. The company provides food, family apparel, housewares, appliances etc. The company also offers services, including post offices, income tax return preparation, money transfers, commercial business sales and others. 

Key highlights

• Improved Performance leads to higher dividend distribution: In recent years, the company reported an elevated revenue and profitability, which has helped the company to allocate higher dividend to its shareholders, which is encouraging. Notably, the company paid a higher dividend of CAD 67.2 million in FY20, compared to CAD 64.3 million in FY19. Moreover, at the last traded price, the stock was offering a dividend yield of ~4.0%, which looks decent considering the current interest rate scenario.

• Increase in Cash from Operating Activities: Cash flow from operating activities increased CAD 177.6 million or 110.2% to CAD 338.7 million compared to 2019 due to a CAD 74.6 million increase in cash earnings to CAD 271.7 million and an increase in cash from the change in non-cash working capital and other non-cash items of CAD 103.0 million.

Source: Company

• Industry beating margins: Despite the second wave of the Covid-19 Pandemic, the Company maintained its pace and witnessed spirited performance across its margin matrix. The management’s solid determination helped them leap the industry median margins on many fronts in FY2021, which is a key positive. The chart below gives a glimpse of this. 

• Reducing Debts: The Company's debt-to-equity ratio at the end of the reported period stood at 0.56:1 compared to 0.96:1 last year. The long term debts curtailed to CAD 245.6 million from CAD 427.6 million on October 31, 2019. This step itself reflects that the company is focused on debt reduction and is generating positive cash flows.

Financial overview of FY2021

Source: Company

• The company announced its full year result, wherein it posted sales of CAD 2,359.2 million, against CAD 2,094.3 million in the previous corresponding period. The increase was mainly driven by 19% growth in same-stores sales, driven by both food and general merchandise sales gains.
• Gross profit in the reported period stood higher at CAD 774.5 million compared to CAD 664.3 million in pcp, supported by a higher sale, while a higher cost of sales at CAD 1,584.6 million V/s CAD 1,429.9 million in the previous corresponding period acted as a dragger.
• The company’s earnings from operations soared to CAD 209.3 million against CAD 130.3 million in the previous comparable period. The increase was driven by higher gross profit, partially offset by higher selling, operating and administrative.
• Net earnings were recorded at CAD 143.6 million compared to CAD 86.3 million in the previous corresponding period, mainly due to above discussed rationales.
• The group reported a cash balance of CAD 71.5 million, while total assets were recorded at CAD 1,191.1 million.
  

Risks associated with investments

The COVID-19 pandemic clouds the Company's near-term outlook. There is downside risk due to potentially severe economic challenges within tourism-dependent countries which do not have strong government income support programs such as the British Virgin Islands and St. Maarten. Approximately 20% of the Company's retail business depends on tourism or commercial natural resource activities, where COVID-19 has hardest hit employment.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation: FY2021, was a transformational year for the company as it came out with the robust performance, increase in same-store sales, reduced debts, and healthy dividend distribution. All these factors give a glimpse of strong foundations led by the company. The company also foresees revenue to remain above average through the duration of COVID-19, based on its role as an essential service provider. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 35.64 on June 3, 2021. We have considered Sleep Country Canada Holdings Inc, Rogers Sugar Inc, Dollarama Inc etc. as the peer group for the comparison.

One-Year Technical Price Chart (as on June 02, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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