North West Company

Defensive Business Acts as Hedge: North West Company Inc. (TSX: NWC) is a food and everyday products retailer, which focuses on rural and urban neighbourhood markets in the Canada, South Pacific, Alaska, and the Caribbean. The company generates majority of its income from food products and derives more than 60% of its revenues from the Canadian market. Moreover, it also offers apparel, appliances, outdoor products, and other household items. Also, the company operates in-store pharmacies.

Financial highlights: North West Company posted revenues of CAD 2,094.39 million in FY20, up about 4% y-o-y. The y-o-y growth in sales came on the back of sustained momentum in the base business as well as benefits from new store opening. Same-store sales increased 1.3% in FY19. Food sales rose 3.6% y-o-y, driven by 1.9% increase in same-store sales. General merchandise sales increased 1.5%. However, general merchandise same-store sales fell 1.1%. Gross profit increased 3.7% y-o-y to CAD 664.40 million, reflecting higher sales. Selling, operating and administrative expenses increased 5.8% y-o-y due to the negative impact of foreign exchange rate, new store opening, and higher insurance costs.

Adjusted EBITDA fell 2% as gains in the northern markets and NSA were more than offset by declines in the GT store performance. Net earnings fell 4.8% to CAD 86.3 million. Meanwhile, adjusted net earnings fell about 10.6% as benefits from higher gross profits was more than offset by higher expenses and weak performance of GT stores. The company had cash of CAD 28.19 million at the end of FY19, as compared to CAD 38.45 million in FY18.

Financial highlights (Source: Company Reports) 

Valuation Methodology (Illustrative): P/E Multiple Approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock recommendation: Investors should note that the company’s product offerings cover a wide range of everyday essentials, which is likely to keep the cash register ringing. The company is likely to benefit from increased demand from local customers due to the COVID-19 outbreak as 91% of its sales are in essential products & services. The company’s online services including home delivery and store pick-up are likely to support sales. North West Company is focusing on reducing costs to remain afloat amid the crisis. Besides the company is targeting to reduce the capex spend to CAD 65 million to boost liquidity. Also, the company announced the sale of 34 Giant Tiger stores. Notably, GT stores continued to underperform. NWC’s defensive business acts a hedge amid big market swings. Currently, NWC stock is trading at a higher valuation multiple when compared to peers. We expect the multiple to expand further as higher sales, cost cutting measures and divestiture of underperforming businesses bode well for growth.  We have valued the stock using P/E based relative valuation method with a target multiple of 15.5x and arrived at a target price implying a potential upside in low double-digits. Hence, we recommend a “buy” on the NWC stock at the closing market price of CAD 23.51, up 0.5% as on April 15, 2020.

NWC Daily Price Chart (Source: Thomson Reuters) 

Goodfood Market Corp.

Growing Customer-Base, Increased Demand to Support Growth: Goodfood Market Corp. (TSX: FOOD) is a leading online grocery company in Canada, which delivers fresh meal and grocery items to customers.

Investors should note that the company’s offerings are under the purview of essentials and defensive nature of the business makes it immune to any economic cycles. Despite high volatility in the market, FOOD stock has generated a lucrative return of ~15% during the last one-year timeframe. Notably, the stock is trading above its 200-day simple moving average (SMA), which reflects investor’s confidence in the stock.

Q2FY20 Financial Highlights: On April 8, Goodfood Market announced strong second quarter results for the period ended February 29, 2020. The company’s revenues marked stellar growth, while net loss narrowed. The company posted revenues of CAD 58.79 million, reflecting a strong growth of 61% y-o-y. The y-o-y growth came on the back of increase in the number of subscribers. Moreover, increased penetration, higher average order value, and expanded private label offerings further supported top line growth. Gross merchandise sales jumped 48% y-o-y to CAD 68.93 million. Strong revenues drove stellar growth in gross profit, which increased 133% y-o-y to CAD 17.82. Gross margin surged to 30.3% from 20.9% in the prior-year period.  The company reported net loss of CAD 3.36 million, reflecting higher SG&A expenses and increase in net finance costs. However, net loss narrowed from CAD 6.6 million in the prior-year period, which is encouraging. The company had cash & cash equivalents of CAD 67.04 million, as compared to CAD 45.15 million at the end of the prior-year period.

Q2FY20 Financial Highlights (Source: Company Reports)

Stock Recommendation: FOOD stock has been resilient to recent stock market crash, thanks to the company’s defensive business model. Goodfood Market remains well positioned to benefit from the spike in demand as more and more people opt for online shopping as they stay indoors. The company is likely to benefit from rapid growth in its subscriber base, higher average order value, increased product offering, and value pricing. The company expects the COVID-19 pandemic to positively impact its third quarter revenues. The company projects growth in subscriber base. Besides, it expects to see higher order rates and average order values. Goodfood Market is not yet profitable. However, with sustained growth in active subscribers and increased efficiencies, we expect gradual improvement on the profitability front. We remain upbeat on FOOD stock, but its operations could take a hit from supply-chain disruption, labour shortages, and increased operational costs. Hence, we recommend a “Speculative Buy” on the stock at the closing market price of CAD 3.61, up 1.12% as on April 15, 2020.

FOOD Daily Price Chart (Source: 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.