Canadian Tire Corporation

Canadian Tire Corporation (TSX: CTC.A) sells home goods, sporting equipment, apparel, footwear, automotive parts and accessories, and vehicle fuel through more than 1,750-store network of company, dealer, and franchisee-operated locations across Canada. Apart from the namesake banner, stores operate primarily under the Mark's, SportChek, Party City, Atmosphere, and PartSource monikers. 

Key Highlights:

• Trading above the long-term support levels: The stock of CTC.A closed above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend. Moreover, the stock appreciated ~34% and ~74%, respectively, in the last six months and nine months, respectively, supported by improved retail performance across Canada.

(Source: Refinitiv, Thomson Reuters)

• Elevated Dividend Distribution: The company reported an increase in its dividend distribution, backed by solid cash flow generation, which indicates operational resiliency. During FY20, the group distributed a total dividend of CAD 359.1 million, higher than CAD 326.6 million a year ago.

                                        Source: Company Reports

• Lower Debt Component: The group reported a lower debt component of CAD 4,938.20 million at the end of FY20, as compared to CAD 5,589.90 million in FY19. Net finance costs were lower compared to the prior year, mainly attributable to lower medium-term and short-term funding volume and rates. Continuation of the above trend would support the company’s bottom-line due to a lower finance cost.

Q4FY20 Financial Highlights:

• The group posted retail sales of CAD 5,317.2 million, reflecting a growth of 9.9% on y-o-y basis. The increase was driven by strong e-commerce growth, followed by strong growth within omni-channel.
• Gross margin improved to CAD 1,849.9 million, higher than CAD 1,503 million in the previous corresponding period (pcp), supported by higher revenue.
• Income before income taxes came at CAD 718.6 million, significantly higher than CAD 419.3 million in pcp. The increase was supported by higher gross margin and a lower finance costs (CAD 58.8 million versus CAD 66 million in pcp), partially offset by a higher selling, general and administrative expense (CAD 1,053.6 million versus CAD 943.7 million in pcp).
• The company posted a net income of CAD 521.8 million, reflecting a solid growth of 42.6% on y-o-y basis.
• Cash and cash equivalents stood at CAD 1,327 million, while total assets were recorded at CAD 20,377.1 million.

Q4FY20 Income Statement Highlights (Source: Company Reports)

Risks: Further restriction from the government would result in a lower retail demand, which might hinder the company’s topline and cash flows.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock Recommendation:

The group reported solid operational performance and posted cash flow from operations for FY20 at CAD 2,442.8 million, significantly higher than CAD 1,087.6 million a year ago, which indicates operational efficiency. The group reported strong performance within the retail segment, driven by higher shipments and the Company’s cost and margin-sharing arrangement with the company’s dealers, coupled with an increase in revenue from Mark’s and Helly Hansen. The Property Revenue during FY20 increased 2.7% on y-o-y basis despite a tepid real-estate demand, primarily due to contractual rent escalation, additional base rent relating to properties acquired, and intensifications completed during 2020 and 2019. We have valued the stock using the P/E multiple based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Alimentation Couche-Tard Inc, Loblaw Companies Ltd etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 179.04 on February 19, 2021.

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

Empire Company Limited

Empire Company Limited (TSX: EMPA) is a Canadian company which is engaged in the business of food retailing and related real estate. The Company's segments include Food Retailing, and Investments and Other Operations.

Key highlights: 

• Opening of Seven new freshCO stores: The Company has reached the half-way mark in Western Canada discount expansion plans with the announcement of seven new freshco stores. Since April 2019, the Company has opened 16 FreshCo stores in B.C., two in Manitoba and four in Saskatchewan. By the end of fiscal 2022, they plan to have 37 FreshCo stores open in Western Canada. We believe the opening of these stores would further propel the revenue and future cash flows. 

• Focusing on improving margins:The Company launched Project Horizon, three-year strategy regarding growth plan, focused on core business expansion and e-commerce acceleration. The Company targets an incremental CAD 500 million in annualized EBITDA and an improvement in an EBITDA margin by 100 basis points by fiscal 2023 through growing market share, building on its cost and margin discipline. 

• Rise in Free cash flows: The Company increased itsFree cash flow in Q2 2021 to CAD 75.2 million, primarily due to a decrease in capital investments and the timing of rent payments due to the reporting quarter end date, partially offset by a decline in proceeds on disposal of assets. For fiscal 2021, capital spending is expected to be between CAD 650-675 million, with approximately half of this investment, would be allocated to renovations and new stores.

Source: Company 

• Robust Liquidity: The Company believes its cash and cash equivalents of CAD 756 and access to approximately CAD 756 million in unutilized, aggregate credit facilities that do not expire until fiscal 2023, along cash generated from operating activities would enable them to fund future capital investments, working capital and ongoing business requirements easily. 

Financial overview of Q2 2021

Source: Company 

• In Q2 2021, the company reported CAD 6.97 billion of sales, increased by 8.4% against CAD 6.43 billion in the previous corresponding period. The increase in revenue was primarily due to market share gains in the Food retailing segment and the expansion of FreshCo in Western Canada.
• Operating income increased by 7% to CAD 306.5 million in Q2 2021, compared to CAD 286.4 million in Q2 2020. The rise in operating income was mainly due to improved earnings from the Food retailing segment because of higher sales driven by the impact of COVID-19 and higher margins, partially offset by higher selling and administrative expenses.
• The company's net earnings in Q2 2021 stood at CAD 176.8 million, compared to CAD 160.3 million in the previous corresponding period. An increase in net income was primarily due to the above-stated reasons, partially offset by higher income tax.

Risks associated with investment

The COVID-19 pandemic clouds the Company's near-term outlook. While the Company foresees revenue to remain above average through the duration of COVID-19 based on its role as an essential service offering but lower consumer spending, coupled with a decline in the traffic, might act as a dragger, which would dampen the overall performance of the Company. 

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

In Q2 FY21, the company came out with healthy performance, where same-store sales excluding fuel increased by 8.7% and the company clocked free cash flows of CAD 75.2 million. The company also maintains a healthy balance sheet with CAD 756 million in cash and cash equivalents along with access to approximately CAD 756 million in unutilized, aggregate credit facilities. Furthermore, the group plan to have 37 FreshCo stores open in Western Canada, and we believe the opening of these stores would further propel the revenue and future cash flows. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing price of CAD 36.77 on February 19,2021. We have considered Loblaw Companies Ltd, Alimentation Couche-Tard Inc, Canadian Tire Corporation Ltd, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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