Empire Company Limited

Empire Co Ltd (TSX: EMP.A) operates in food retailing, investments, and other operations. The food retailing derives the majority of the company's income and owns and franchises more than 1,500 stores across 10 provinces, under retail banners including Sobeys, Safeway, IGA, Foodland, FreshCo, Thrifty Foods, Lawton's Drug Stores, and multiple retail fuel locations. Other segments like investment and other operations segment include the investment in Crombie REIT, which is an open-ended Canadian real estate investment trust, as well as the Genstar Development Partnership.

Q1FY21 Financial Highlights: The group impressed with its quarterly results, wherein the company posted sales of CAD 7,354.2 million as compared to CAD 6,744.1 million in the previous corresponding period (pcp). The increase was driven by 9.0% growth within the food retailing segment on account of COVID-19 coupled with the expansion of FreshCo in Western Canada and the opening of new stores. Furthermore, the e-commerce segment in Quebec and British Columbia experienced sales growth of ~370% on y-o-y basis, which contributed to the top-line growth. Meanwhile, lower fuel sales as a result of COVID-19 remained a drag. Operating income increased to CAD 377.6 million from CAD 266.1 million in pcp, thanks to the sales growth, partially offset by higher cost of sales and selling and administrative expenses. Earnings before income taxes stood at CAD 306.9 million, significantly higher than CAD 194.4 million in pcp. Net earnings were recorded at CAD 216.8 million, as compared to CAD 142.8 million in the previous corresponding quarter.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Risks: Investment in the stock is subject to inherent risks, uncertainties, and other factors. The outbreak of COVID-19 has resulted in restrictions and shutdowns, leading to increased safety protocols in stores and distribution centres, shifts in consumer demand and consumption, and volatile financial markets.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation: The stock stood resilient in the recent past and has given a ~31% return in the last six months. In the first quarter of fiscal 2021, the Company launched its new three-year strategy, Project Horizon, a growth plan focused on core business expansion and e-commerce acceleration. The Company is targeting an incremental $500 million in annualized EBITDA and an improvement in EBITDA margin of 100 basis points by fiscal 2023 by (i) growing market share and (ii) building on its cost and margin discipline. The group is focused on building the foundation of its advanced analytics capabilities, which will drive improvements in customer-facing elements such as store footprints, customer promotions and availability of product on a shelf. Furthermore, the group has significantly improved its efficiency and cost competitiveness, during the last three years through Project Sunrise while the Company further finds opportunities to remove non-value-added costs, contain costs as the top line grows and optimize margins. With the gradual opening up of restaurants and hospitality segment, the Company expects a surge in demand from these segments, that would lead to volume growth for the Company. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a high single-digit upside (in percentage terms). For the said purposes, we have considered Metro Inc, Dollarama Inc and Alimentation Couche-Tard Inc etc., as a peer group. Hence, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 37.89 on September 11, 2020.

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

North West Company Inc

North West Company Inc (TSX: NWC) is a General Retailers Company based out of Canada. The company is a retailer of every day and food products to underserved rural communities and urban local markets located in Western Canada, Northern Canada, the Caribbean, the South Pacific islands and rural Alaska.

Q2FY20 Financial Highlights: NWC announced its quarterly results, wherein the company posted sales of CAD 648.5 million as compared to CAD 527.3 million in the previous corresponding period (pcp). The increase was driven by new store sales and the positive impact of foreign exchange on the translation of International Operations sales. Gross profit increased 28.2% on y-o-y basis aided by higher sales, as compared to the previous corresponding quarter. The gross profit margin also improved during the quarter. The increase in gross profit margin was primarily due to favorable changes in product sales blend coupled with higher inventory turns contributing to lower markdowns and lower inventory shrinkage. EBITDA soared to CAD 110.9 million as compared to CAD 51.6 million in pcp. The group’s net earnings increased to CAD 62.6 million, significantly higher than CAD 17.9 million in Q2FY19. Adjusted EBITDA stood at CAD 95.9 million as compared to CAD 53.6 million in pcp. The company ended the quarter with cash of CAD 73.465 million, while total assets stood at CAD 1,225.166 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Further breakout of the coronavirus might affect the logistics and distributions of the group and result in store closure.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation: The stock soared ~31% in the last six-months amid volatility in the equity market. The Company foresees revenue to remain above average through the duration of COVID-19 based on its role as an essential service and an ongoing shift in consumer spending in favour of the Company's product and service offerings. The Company expects that COVID-19-related expenses will decrease in the second half of the year to approximately CAD 6.0 million compared to CAD 11.3 million in the first half of the year. The Company is on track to achieve the previously announced CAD 17.0 million in annualized administrative cost savings by the end of the year. The Company is optimistic about its medium and longer-term outlook, and the Company is leveraging on its lower pricing and cost positions. The Company emphasizes on execution capability and the resiliency of its everyday essential product and service focus. Further, the Company is paying a regular dividend to its shareholders, when most of the companies are cancelling or reducing the dividend payment, which indicates a strong cash flow generations and financial flexibility. The stock of NWC carries a healthy dividend yield of ~4.66% on an annualized basis. Further, to enhance liquidity, the Company issued USD 70.0 million senior notes in two tranches, which is likely to support the current working capital requirements. We have valued the stock using Price to CF based relative valuation method and have arrived at a higher single-digit upside (in percentage terms). For the said purposes, we have considered peers like Leon's Furniture Ltd, Premium Brands Holdings Corp etc. Hence, we recommend a 'Hold' rating on the stock at the closing market price of CAD 30.91 on September 11, 2020.

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

Disclaimer

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