North West Company Inc.

North West Company Inc. (TSX: NWC) Inc is a Canada-based company, which operates in retail business in underserved rural communities and urban neighborhoods. The company provides food, family apparel, housewares, appliances, and outdoor products, with food products accounting for the majority of the company's revenue. 

Key Highlights:

• Consistent Dividend Distribution: The company has a solid history of consistent dividend payment, backed by stable cash flows. During 9MFY20, the company paid a total dividend of CAD 49.748 million, higher than CAD 48.262 million in 9MFY19. At the last closing price, the stock of NWC was offering an annualized dividend yield of ~4.5% amid low interest rate environment.

Ten-years dividend history (Source: Refinitiv, Thomson Reuters)

• Strong Growth in Cash flows: The company reported strong operational performance and reported cash from operations at CAD 250 million and CAD 232.058 million in Q3FY20 and 9MFY20, respectively, as compared to CAD 27.566 million and CAD 112.797 million in Q3FY19 and 9MFY19, respectively. The increase was primarily supported by higher net earnings and improved working capital management.

Source: Company Reports

Q3FY20 Financial Highlights:

• NWC declared its quarterly results, wherein the group posted sales of CAD 552.975 million, higher than CAD 519.521 million in the previous corresponding period (pcp). The increase was driven by strong momentum from the food segment from both International and Canada geographies.

Q3FY21 Segment Highlights (Source: Company Reports)

• Gross profit stood higher at CAD 185.064 million, as compared to CAD 169.307 million in pcp, thanks to a higher income, partially offset by a higher cost of sales (CAD 367.911 million versus CAD 350.214 million in Q3FY19).
• Earnings from operations were recorded at CAD 52.934 million, reflecting strong growth from CAD 36.99 million in pcp. The increase was driven by higher gross profit and slightly lower selling, operating and administrative costs (CAD 132.130 million versus CAD 132.317 million in pcp).
• Net earnings stood at CAD 35.914 million, increased from CAD 24.838 million in Q3FY19.
• The group reported a cash balance of CAD 59.712 million, while total assets were recorded at CAD 1,212.470 million.

Q3FY21 Income Statement Highlights (Source: Company Reports)

Risks: The group’s performance might be impacted by changing customer preferences due to economic cycles. Moreover, the management highlighted that due to the sale of Giant Tiger stores, the group might witness lower sales in the Q4FY20, as compared to Q4FY19.

Valuation Methodology (Illustrative): Price to Earnings-based

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

Stock Recommendation:

The group operates through essential products, and ~91% of the company’s sales are driven from the above segment. The company has lowered its debt component to CAD 460.3 million in Q3FY20 from CAD 526.9 million in Q1FY19, which is encouraging and augurs well for lower finance costs. Moreover, during Q3FY20, the company delivered strong operational efficiency and posted Gross margin and EBITDA margin of 33.5% and 14.1%, respectively, higher than the industry median of 22.5% and 6.1%, respectively. Moreover, the company’s net margin stood significantly higher at 6.5%, as compared to the industry median of 2.2%. We have valued the stock using P/E based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Sleep Country Canada Holdings Inc, Sleep Country Canada Holdings Inc, Mav Beauty Brands Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the current market price of CAD 31.94 on February 22, 2021.

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

Disclaimer

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