North West Company Inc. 

The North West Co Inc (TSX: NWC) is a Canada-based company that is principally engaged 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. 

Why Should Investors Book Profit? 

• Increasing uncertainties: The resurgence in Delta variant cases is throwing a lot of uncertainties, it could impact the company’s sales in foodservice and retail sector as government could reinforce some mandated lockdowns to counter the spread. In Q1 2022, the company witnessed lower consolidated sales.
• Poor inventory management: In Q1 2022, the company’s inventory turnover ratio stood at 1.6 against an industry median of 2.8. Low inventory turnover indicates weaker sales and declining demand for a company's products. On the flip side, it is having higher average inventory days of 57.6 days against an industry median of 32.7 days, indicating the company's cash is tied up in inventory for a longer period, meaning it cannot be deployed for other purposes.
• Higher Cash Cycle days: The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 72.3 days against the industry median of 12.7 days.
• Stretched Valuation: NWC shares are available at an NTM P/E multiple of 14.3x compared to the industry (Consumer Non-Cyclical) average of 11.6x. This implies that the shares are overvalued against the industry.
• Trading above the upper band of the Bollinger Bands®: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation.

Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The Company's near-term consumer outlook remains highly influenced by the COVID-19 pandemic. Furthermore, the company is having a poor inventory management along higher cash cycle days, which could lead to poor liquidity profile. Moreover, the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 36.92 on August 23, 2021.

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

Disclaimer

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