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 neighbourhoods. 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 

• Update on Giant Tiger Transaction: The Company completed the previously announced sale of 36 of the Company's 46 Giant Tiger stores to Giant Tiger Stores Limited ("GTSL") for CAD 45.0 million. As part of the Giant Tiger Transaction, the Company and GTSL entered into reciprocal product supply and distribution agreement enabling buying efficiencies for both parties, and it will provide the Company with access to an expanded general merchandise assortment. 

• An income play: The company has a strong history of dividend distribution, which establishes the fact that the company’s business is resilient and has reported stable cash flows over the years. On December 9, 2020, the company approved a quarterly dividend of CAD 0.36 per share, payable on January 15, 2021, with a record date of December 31, 2020. At the last closing price, the stock was offering a yield of 4.02%, which is lucrative looking at the current interest rate environment.

Source: Company

Reducing Debts: The Company's debt-to-equity ratio at the end of the reported quarter stood at 0.69:1 compared to 1.01:1 last year. Groups 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 Q3 2020

Source: Company 

• In Q3 2020, the company posted revenues of CAD 553 million, increased by 6.4% as against CAD 519.5 million in Q3 2019. Same-store sales were up by 17.8% primarily driven by market share gains and the positive impact of foreign exchange on the translation of International Operations sales.
• The company reported gross profit of CAD 185 million in Q3 2020, as against CAD 169 million in Q3 2019. The rise in gross profit rate was primarily due to favourable changes in product sales blend, and higher inventory turns contributing to lower markdowns and less inventory shrinkage.
• Net earnings attributable to North West Company Inc stood at CAD 34.6 million in Q3 2020, compared to CAD 24.1 million in the previous corresponding period, primarily due to high revenue and low-interest expense.

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 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Q3 FY20, was a transformational quarter 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 have given a ‘Hold’ rating at the closing price of CAD 35.82 on December 11, 2020. We have considered Sleep Country Canada Holdings Inc, Roots Corp, Leon's Furniture Ltd etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Empire Company Ltd

Empire Company Ltd (TSX: EMP.A) operates in food retailing, investments, and other operations. The food retailing division operates through represents the majority of the company's income.

Key Updates:

• Focus on expansion: The company reported openings of 22 new retail stores in FY20, which would support the revenue. Moreover, the company has a solid pipeline of new stores which includes six stores to open in FY21 and two stores in FY22.
• Impressive Guidance: The company framed out strong financial guidance for the next three years and is targeting an incremental CAD 500 million and improvement in the EBITDA margin of 100 basis points by FY23. The company expects its future growth would be driven by growth in Canadian Grocery eCommerce segment, improvement in the store space productivity, and optimize supply chain productivity etc.

Q2FY21 Financial Highlights:

• The group announced its quarterly results, wherein the company posted sales of CAD 6,975.4 million, higher than CAD 6,436.5 million in Q2FY20. The increase was primarily attributable to higher market share gains within the Food retailing segment coupled with the expansion of FreshCo in Western Canada, which was partially offset by lower fuel sales as a result of COVID-19 and temporary store closures in Western Canada pending conversion to FreshCo.
• Operating income stood at CAD 306.5 million, as compared to CAD 286.4 million in the previous corresponding period (pcp), supported by higher sales, partially offset by an increase in the cost of sales (CAD 5,224.3 million versus CAD 4,840.8 million in pcp) and higher selling and administrative expenses (CAD 1,462.6 million versus CAD 1,351.5 million in Q2FY20).
• Net earnings stood higher at CAD 176.8 million, as compared to CAD 160.3 million in pcp.
• The company reported cash and cash equivalents of CAD 755.6 million, while total assets of CAD 14,567 million.                  

Q2FY21 Income Statement Highlights (Source: Company Reports)

Risks: Changing customer preference, extension of social distancing measures and store closure restrictions on account of a further breakout of COVID-19 might dampen the company’s overall performance.

Valuation Methodology (Illustrative): Price to Earnings based

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

Stock Recommendation: The company expects that it is likely to grow faster than its key competitors, which would result in improving EBITDA and expects an EPS to record a CAGR of at least 15% over the three years. Meanwhile, the company is expected to spend ~CAD 700 million on an annualized basis, over the next three years. The Company intends to invest approximately 15% of its estimated spending on advanced analytics technology and other technology systems. We have valued the stock using Price to Earnings based relative valuation approach and arrived at a target price offering single-digit upside side potential (in % terms). We have considered peers like Alimentation Couche-Tard Inc, Canadian Tire Corporation Ltd etc. Considering the above-mentioned facts, we have given a ‘Hold’ rating on the stock at the closing price of CAD 35.73 on December 11, 2020.

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

Disclaimer

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