Empire Company Limited

Empire Company Limited (TSX: EMP.A) is a Canadian company which operates in food retailing through its wholly owned subsidiary Sobeys Inc., and related real estate. 

Key Highlights:

• Elevated Financials: From FY17 onwards, the performance of the company has remained in uptrend, driven by improved stores presence, strategic acquisitions and cost-efficiency strategies which has led to margin improvement. From FY17 till date, the company registered an 18.6% CAGR in Adjusted EBITDA and a whopping 47% CAGR in adjusted EPS, which is encouraging. 

Source: Company Presentation 

• Industry beating Margins: The company reported a higher margin, as compared to the industry median, which indicates that the company’s is performing better than the industry. In Q3FY21, Gross margin and EBITDA margin stood at 25.7% and 7.30%, respectively, significantly higher than the industry median of 21.80% and 5.1%, respectively. Moreover, the company reported its net margin at 2.7% in Q3FY21, higher than the industry median of 1.90%.

Source: Refinitiv (Thomson Reuters)

Q3FY21 Financial Highlights:

• A announced its quarterly result, wherein the company posted sales of CAD 7,018.7 million, higher than CAD 6,395.2 million in the previous corresponding period (pcp). The increase was supported by the expansion of FreshCo in Western Canada and Farm Boy in Ontario, partially offset by power fuel sales as a result of COVID-19.
• Operating income soared to CAD 320.4 million, from CAD 235.0 million in Q3FY20. The increase was driven by improved earnings from the food retailing segment, partially offset by an increase in operating expense.
• Net earnings were reported at CAD 187.3 million, as compared to CAD 120.9 million in pcp.
• Cash and cash equivalents were recorded at CAD 784.3 million at the end of January 31, 2020, while total assets stood at CAD 14,962.4 million.

Source: Company Reports

Risks: The company’s products are prone to seasonality and fluctuations in inflation. Moreover, a change in consumer preference might lead to a lower demand.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock Recommendation:

The company is working on its three-year growth prospective module, wherein the company would invest in its own network and would focus on store productivity, private label, store renovations, and new stores etc. The company is emphasizing on accelerating its grocery sales through the e-commerce segment and is focusing on providing best in class customer personalization in order to win repetitive orders. The expected capital invested is calculated at ~CAD 700 million over the next three years. Recently, the company made a pilot launched Danavation's Digital Smart Labels ^TM technology, which offers fresh food product to the wholesalers. This would eliminate extra costs, reducing time and labour expenses related to manual paper labelling, and eventually lead to efficiency optimizations that support the bottom line. We have valued the stock using the price to earnings-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Canadian Tire Corporation Ltd, Loblaw Companies Ltd etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of EMP.A at the last closing price of CAD 38.85 on May 04, 2021.

One-Year Price Chart (as on May 04, 2021). Source: Refinitiv (Thomson Reuters)

The North West Company Inc.

The North West Company Inc. (TSX: NWC) is a leading Canadian retailer which provides food and everyday products and has a significant presence across the rural and urban communities in Canada, Alaska, the South Pacific and the Caribbean. 

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 67.276 million in FY20, compared to CAD 64.351 million in FY19, backed up by robust growth in cash from operations of CAD 338.718 million in FY20 v/s CAD 161.117 million in FY19. The stock of NWC carries a dividend yield of ~4.1%, which looks decent considering the current interest rate scenario.

Source: Company Reports

• Favorable Macros: Majority of the company’s products comes under essential services, and the demand for these items recorded a superb growth during the pandemic. Meanwhile, the company’s growth was driven by constant management’s focus to improve market share within the existing locations through the imposition of the company’s expertise and infrastructure for the new product categories, markets, and complementary businesses.          

Financial Highlights for twelve months ended January 31, 2021:

• NWC announced its full year result, wherein the company posted sales of CAD 2,359.239 million, v/s CAD 2,094.393 million in the previous year. The increase was driven by 19% y-o-y growth in same-stores sales, driven by both food and general merchandise sales gains.
• Gross profit stood higher at CAD 774.553 million, v/s CAD 664.398 million in pcp, supported by a higher sale, while a higher cost of sales (CAD 1,584.686 million v/s CAD 1,429.995 million in the previous year) remained a drag.
• Earnings from operations soared to CAD 209.349 million, from CAD 130.353 million in the previous period. The increase was driven by higher gross profit, partially offset by higher selling, operating and administrative costs (CAD 565.204 million v/s CAD 534.045 million in the previous year).
• Net earnings were recorded at CAD 143.560 million compared to CAD 86.273 million a year ago.
• The group reported a cash balance of CAD 71.536 million, while total assets were recorded at CAD 1,191.168 million.

Source: Company Report

Risks: A shift in consumers preference would lead to a lower sales volume and subsequently dampen the company’s performance.

Valuation Methodology (Illustrative): P/E based valuation

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

Stock Recommendation:

The company introduced flexible store models and improved its store management through convenient store-level merchandise ordering and enterprising incentive plans, which helped it to sustain the leading market position. For FY21, the company anticipates its revenue to remain above average, supported by the changing shift of consumers preference towards the essential items. We have valued the stock using the price to earnings-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, Dollarama Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of NWC at the last closing price of CAD 35.44 on May 04, 2021.

One-Year Price Chart (as on May 04, 2021). 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.