| 2018 | 2019 | ||||||
| Price: | 4.15 | EPS | .28 | .31 | |||
| Shares Out. (in M): | 63 | P/E | 15 | 14 | |||
| Market Cap (in $M): | 263 | P/FCF | 1.9 | 2.1 | |||
| Net Debt (in $M): | -157 | EBIT | 14 | 18 | |||
| TEV (in $M): | 106 | TEV/EBIT | 8 | 6 | |||
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$CAD000s
Thesis
Reitman’s (“RET”) is the leading female specialty retailer in Canada that trades for less than net-net, is profitable and growing, and does ~$.50 per share in annual FCF (using maintenance capex). RET is one of the cheapest stocks we’ve come across in the last couple of years. The company is the leading plus sized women’s apparel retailer in Canada with a ~20% share of that market. RET operates multiple store brands including Reitman’s (268 stores), Pennington’s (119 stores), Addition Elle (88 stores), RW & CO. (84 stores), and Thyme Maternity (62 stores). RET is cheap on cash flows and on an asset basis: it trades for a valuation of 1.9x LTM EV/LTM EBITDA and a 25%+ unlevered FCF yield, with $4.45 of liquidation value per share. We believe that it is quite likely that free cash flow will grow as e-commerce continues its rapid growth (35%+ annually) and new store capex investments moderate. We think RET can offer an attractive risk/reward within a 2-5 year investment horizon. Our thesis:
(1) RET is absolutely cheap: it has limited downside given that the balance sheet is comprised of cash and short-term investments of $2.78 per share (60% of market cap is net-cash), net working capital of $.80 per share and the balance being owned land and buildings of ~$1.34 per share. Our liquidation value analysis shows that shutting down the business TODAY, exiting the leases, and selling off the assets would yield equity owners over $4 per share, so your downside is protected.
(2) Potential Catalysts:
- Continued growth of e-commerce and wholesale brands: ~$100M, or roughly 12% of RET’s revenues, are e-com sales which are growing 35%+ annually, with no reason for that to slow as the company continues to invest in its e-commerce capabilities (RET fulfills through an efficient centralized distribution model). This rapid growth combined with the company’s relatively fixed operating cost structure should dramatically increase the earnings power of the company over the next couple of years. The company has a solid wholesale brand portfolio that accounts for 2% of revenues and is growing rapidly.
- Improving financial picture: The company’s reported Adjusted EBITDA doesn’t add back one-time charges such as severance—RET is significantly more profitable than it appears. More importantly, the company reports 3 comparable store figures—the one investors should focus on is the overall Total comp (store + e-ecom), which is representative of the true state of sales growth. RET just recently reported one of its best quarterly Total comp in over a year. Total comp has been consistently positive for the past 4 years, including the year-to-date and most recent quarter.
- Retail Private Equity Buyout: a retail PE shop could pay a premium for RET, lever the business 1-2x, monetize the real estate, sell the wholesale brands, and earn an attractive financial return. Recent examples of such deals include Jones New York, Talbots, and Hot Topic.
(3) Solid capital allocation: RET pays a ~5% dividend and has repurchased stock.
The asymmetric risk/reward makes this stock attractive even if you think none of the catalysts will play out. So the question remains—why does this opportunity exist?: (1) It’s in a hated sector, retail, and it’s in Canada. (2) No analyst coverage. (3) Relative Illiquidity of the shares. (4) Family ownership turns off investors.
Note: RET-A and RET both trade on the Toronto Exchange, and there are no economic differences between them, however the RET votes while the A shares do not. Average daily dollar volume traded is less than $100K on both share classes combined, but there are days of substantially greater volume.
Business Description
RET is the largest women’s specialty retailer in Canada. The typical store size ranges from 3,000-5,000 square feet. The majority of RET’s merchandise is moderately priced and targeted to appeal principally to young female customers. The majority of the stores are located in enclosed shopping malls and power centers, which are situated both in central and suburban metropolitan areas and in smaller towns in Canada. Walmart is a key adjacent store. 90% of apparel is private label merchandise, and are fashion “followers”, thus mitigating merchandising errors. RET is the low-cost/price player among its peers, with prices matching or beating in most categories of apparel. The company has also focused its wholesale expansion beyond Canada with its plus-sized offerings. For example, Addition Elle banner launched an “Ashley Graham” collection online at Nordstrom. Lord&Taylor (oldest department store in US) also carries the Addition Elle brand. This segment, according to Management is ~$20M in revenues and is growing double digits.
Given a very difficult retail environment, the company has generated positive comparable store sales for each of the last four years. The 2-year stacked comps show moderate improvements in comps, while the 3-year stacked comps show slight deterioration.
| Store Comp | E-Ecom Comp | Total Comp | |
| Q3 2016 | 4.8% | 72.2% | 7.6% |
| Q4 2016 | 6.3% | 54.0% | 9.0% |
| Q1 2017 | 6.3% | 52.5% | 8.8% |
| Q2 2017 | 4.0% | 45.4% | 6.3% |
| Q3 2017 | 4.7% | 40.1% | 7.1% |
| Q4 2017 | 3.5% | 55.1% | 7.9% |
| Q1 2018 | 1.2% | 55.5% | 5.4% |
| Q2 2018 | -0.6% | 39.9% | 2.5% |
| Q3 2018 | -1.9% | 29.7% | 0.8% |
| Q4 2018 | -1.1% | 34.3% | 3.2% |
| Q1 2019 | -3.9% | 21.9% | -0.8% |
| Q2 2019 | -1.2% | 40.8% | 3.4% |
| Q2 2019 | Q1 2019 | Q4 2018 | |
| 2-year Total Comp | 5.9% | 4.6% | 11.1% |
| 3-year Total Comp | 12.2% | 13.4% | 20.1% |
| 2-year Store Comp | -1.8% | -2.7% | 2.4% |
| 3-year Store Comp | 2.2% | 3.6% | 8.7% |
| 2-year E-Com Comp | 80.7% | 77.4% | 89.4% |
| 3-year E-Ecom Comp | 126.1% | 129.9% | 143.4% |
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | Q12018 | Q12019 | Q22018 | Q22019 | |
| Store comp | -0.20% | 2.50% | 4.60% | -0.70% | 1.20% | -3.90% | -0.60% | -1.20% | ||
| Ecommerce comp | 63.50% | 69.10% | 50.70% | 38.20% | 55.50% | 21.90% | 39.90% | 40.80% | ||
| Total comparable sales | -2.00% | -2.80% | 1.20% | 5.10% | 7.60% | 2.90% | 5.40% | -0.80% | 2.50% | 3.40% |
| % ecom sales | 2.20% | 3.90% | 6.51% | 9.25% | 7.73% | 12.02% | 7.65% | 10.95% |
A point worth discussing is the negative Store comp. Management indicated that the leading contributor to this is the e-commerce channel—the online sales are effectively cannibalizing the store sales. As a result, the Total comp is more indicative of organic growth for the overall business, which is positive. RET just recently reported a 3.4% Total comp, which was the best since Q12018.
2016 was an especially difficult year for RET, with Adjusted EBITDA at trough levels (but was still profitable). Since then, the business has inflected positively and earnings have grown, with RET set to do $50M+ Adjusted EBITDA for this upcoming year.
| Historical Financials (CAD 000s) | |||||||||||
| Fiscal Year Jan 30 | |||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | Q22018YTD | Q22019YTD | Q22018 | Q22019 | LTM 7/30 | |
| Revenues | 1,000,513 | 960,397 | 939,376 | 937,155 | 951,989 | 963,958 | 457,847 | 456,418 | 250,757 | 248,797 | 962,529 |
| Growth rate | -4.0% | -2.2% | -0.2% | 1.6% | 1.3% | -0.3% | -0.8% | ||||
| Gross Margin | 62.8% | 61.9% | 60.4% | 56.2% | 54.9% | 54.3% | 54.9% | 55.6% | 55.2% | 55.3% | 54.7% |
| # of Stores | 911 | 878 | 823 | 767 | 677 | 642 | 664 | 636 | |||
| Sames store sales (+ecom) | -2.0% | -2.8% | 1.2% | 5.1% | 7.6% | 2.9% | 2.5% | 3.4% | |||
| Adj. EBIT | 30,938 | 6,729 | 10,800 | -8,734 | -1,500 | -1,600 | -2,300 | 8,000 | 9,100 | 11,000 | 8,700 |
| % margin | 3.1% | 0.7% | 1.1% | -0.9% | -0.2% | -0.2% | -0.5% | 1.8% | 3.6% | 4.4% | 0.9% |
| Adj.EBITDA | 90,593 | 70,453 | 64,800 | 36,800 | 42,700 | 43,300 | 19,400 | 28,300 | 19,500 | 21,400 | 52,200 |
| % margin | 9.1% | 7.3% | 6.9% | 3.9% | 4.5% | 4.5% | 4.2% | 6.2% | 7.8% | 8.6% | 5.4% |
| Capex | 84,433 | 34,524 | 28,960 | 33,354 | 34,370 | 26,998 | 8,780 | 11,304 | 5,651 | 6,539 | 29,522 |
| LFCF | -2,322 | 33,812 | 32,736 | 5,495 | 8,572 | 16,718 | 10,620 | 14,916 | 11,483 | 12,001 | 21,014 |
Valuation
RET owns 2 properties in Canada. The company owns both a well-situated Administration office and a Distribution Center in one of Canada’s most attractive real estate markets. The Quebec Distribution Center is 566k square feet while the Administration Office is 385k square feet. Using comparable property valuations and a 90% NOI margin, we estimate a ~$37M value for the Distribution Center and a ~$48M value for the Administration Office. This is roughly ~$1.34 of per share value for RET investors. We spoke with local real estate brokers to verify the below-values and believe them to be reasonable.
| Sq. Ft. | Net Rental Rate ($/sq ft) | Total Annual Rent | Distance | NOI Margin | NOI | |||||||
| 160 Boul Marcel-Laurin Saint-Laurent, Canada | 47,550 | 5.25 | 249,638 | 6.3 km | Cap Rate | 0.07 | 0.08 | 0.09 | 0.10 | |||
| 8210 Transcanadienne Rte Saint-Laurent, QC | 24,633 | 5.50 | 135,482 | 5.7 km | ||||||||
| 8760 Cote-de-Liesse Saint-Laurent, QC | 65,132 | 6.00 | 390,792 | 7.6 km | ||||||||
| St-Laurent, Quebec Distribution Center | 566,000 | 6.00 | $ 3,396,000 | 90% | $ 3,056,400 | Estimated Value | $ 43,662,857 | $ 38,205,000 | $ 33,960,000 | $ 30,564,000 | ||
| Sq. Ft. | Net Rental Rate ($/sq ft) | Total Annual Rent | Distance | NOI Margin | NOI | |||||||
| 7893 St-Laurent Blvd Montréal, QC | 13,752 | 20.00 | 275,040 | 3.3 km | Cap Rate | 0.07 | 0.08 | 0.09 | 0.10 | |||
| 10222 St. Michel Blvd Montréal, QC | 12,250 | 13.90 | 170,275 | 5.3 km | ||||||||
| 3232 Bélanger St Montréal, QC | 50,325 | 18.00 | 905,850 | 7 km | ||||||||
| Montreal, Québec Administration Office | 385,000 | 13.90 | $ 5,351,500 | 90% | $ 4,816,350 | Estimated Value | $ 68,805,000 | $ 60,204,375 | $ 53,515,000 | $ 48,163,500 | ||
RET could be liquidated for $4.45/share today. Assume RET starts the liquidation process today which could last up to 4 years. RET could exit their remaining future leases by paying 1.5x the 4th year operating lease amount. Running off the business today for the next 4 years (with capex spend of $10M) would yield ~$1.01 of per share value. Equity holders would collect the balance sheet cash, NWC, and land value net of total liabilities and lease exit charges.
| Q2 2019 | 2018 | 2019 | 2020 | 2021 | |||
| 1 | 2 | 3 | 4 | ||||
| Cash and cash equivalents | 115,201 | EBITDA | 40,000 | 30,000 | 20,000 | ||
| Marketable securities | 60,960 | Capex | 10,000 | 10,000 | 10,000 | ||
| Trade and Other Receivables | 6,346 | FCF | 30,000 | 20,000 | 10,000 | 5000 | |
| Inventories | 143,144 | Discount rate | 1.1 | 1.1 | 1.1 | 1.1 | |
| Other | 20,519 | PV FCF | 27,273 | 16,529 | 7,513 | 12,522 | |
| Total Current Assets | 346,170 | SUM FCF | 63,837 | ||||
| FCF/share | $ 1.01 | ||||||
| Distribution Center Value | 37,000 | ||||||
| Administration Office Value | 48,000 | ||||||
| Total Liabilities | 158,143 | ||||||
| Annual Operating Leases | 36,554 | ||||||
| Lease Charge-Offs x1.5 | 54,831 | ||||||
| Balance Sheet Liqudation Value | 218,196 | ||||||
| Shares outstanding | 63,330 | ||||||
| Balance Sheet Liqudation value/share | $ 3.45 | ||||||
| FCF Run-off Liqudation value/share | $ 1.01 | ||||||
| Total Liqudation value | $ 4.45 |
RET is more profitable than it appears. Management didn’t bother adding back one-time costs such as severance in the reported Adjusted EBITDA numbers. We went back and did this ourselves. As one could see, RET has been close to a $50M EBITDA business for the past 2 years, with this upcoming year set to easily exceed these past 2 years.
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |
| Revenues | 1,042,509 | 1,057,720 | 1,050,861 | 1,056,527 | 1,059,000 | 1,019,397 | 1,000,513 | 960,397 | 939,376 | 937,155 | 951,989 | 963,958 |
| Reported Adj.EBITDA | 186,812 | 199,176 | 180,931 | 158,488 | 184,369 | 126,788 | 90,593 | 70,453 | 64,800 | 36,800 | 42,700 | 43,300 |
| Foreign Exchange Gain | -915 | 504 | 1998 | -231 | 473 | 733 | -582 | 3,623 | -1,729 | 4,852 | -2,546 | -351 |
| provision for onerous store leases | 1300 | 2800 | ||||||||||
| severance costs | 4400 | 1700 | 2400 | 3100 | 1200 | |||||||
| merchandise purchase order cancellation costs | 1000 | |||||||||||
| employee head office performance incentive plan expense | 400 | |||||||||||
| Adj. EBITDA | 187,727 | 198,672 | 178,933 | 158,719 | 183,896 | 130,455 | 91,175 | 68,530 | 66,529 | 35,648 | 48,746 | 48,651 |
RET is relatively cheap compared to other US and Canadian retailers, even though it’s arguably operated better. If the market attributed an in-line 4-6x EBITDA multiple to RET, we would have a $5.63 to $7.21 stock price today.
| LTM | RET CN ($000) | ASNA ($mil) | GPS ($mil) | ANF ($000) | EXPR ($000) | URBN ($000) | LB ($mil) | HBC CN ($mil) | LULU ($000) | BKE ($000) |
| Sales | 962,148 | 6,470 | 16,198 | 3,562,490 | 2,143,190 | 3,710,512 | 12,821 | 14,379 | 2,778,580 | 906,026 |
| Gross Profit | 525,942 | 3,728 | 6,190 | 2,127,262 | 626,114 | 1,216,387 | 5,000 | 5,854 | 1,486,628 | 377,997 |
| Adj. EBIT | 16,430 | 100 | 1,390 | 119,349 | 57,091 | 292,752 | 1,674 | -363 | 544,356 | 132,300 |
| Adj. EBITDA | 54,486 | 463 | 1,951 | 312,756 | 145,581 | 419,488 | 2,251 | 336 | 656,201 | 166,860 |
| Invested Capital | 181,456 | 2,157 | 4,164 | 1,170,749 | 442,521 | 731,983 | 4,223 | 9,232 | 746,870 | 224,478 |
| Gross Margin | 54.7% | 57.6% | 38.2% | 59.7% | 29.2% | 32.8% | 39.0% | 40.7% | 53.5% | 41.7% |
| EBITDA Margin | 5.7% | 7.1% | 12.0% | 8.8% | 6.8% | 11.3% | 17.6% | 2.3% | 23.6% | 18.4% |
| ROIC | 5.9% | 3.0% | 21.7% | 6.6% | 8.4% | 26.0% | 25.8% | -2.6% | 47.4% | 38.3% |
| Market Cap | 262,820 | 917 | 12,203 | 1,832,375 | 768,842 | 4,917,852 | 8,834 | 1,775 | 17,188,475 | 1,301,140 |
| EV | 106,147 | 2,077 | 12,077.65 | 1,490,377 | 584,321 | 4,437,772 | 13,610 | 5,392.1 | 16,221,904 | 1,078,053 |
| EV/EBITDA | 1.95x | 4.49x | 6.19x | 4.77x | 4.01x | 10.58x | 6.05x | 16.05x | 24.72x | 6.46x |
| EV/Sales | 0.11x | 0.32x | 0.75x | 0.42x | 0.27x | 1.20x | 1.06x | 0.37x | 5.84x | 1.19x |
| EV/Invested Capital | 0.58x | 0.96x | 2.90x | 1.27x | 1.32x | 6.06x | 3.22x | 0.58x | 21.72x | 4.80x |
| P/Tangible Book | 0.89x | NA | 3.82x | 1.54x | 1.79x | 3.94x | N/A | 11.23x | 10.87x | 3.26x |
| Net-Debt/EBITDA | N/A | 2.51x | N/A | N/A | N/A | N/A | 2.12x | 8.97x | N/A | N/A |
| Px | $ 4.15 |
| Shares (000) | 63,330 |
| Equity (000) | 262,820 |
| Pension(000) | 19,488 |
| Cash (000) | 176,161 |
| EV (000) | 106,147 |
| LTM | 2019 | ||
| EV/EBITDA | 1.9x | 2.1x | |
| UFCF Yield | 30.6% | 23.0% |
Note that LTM includes an extra week.
A private equity firm could easily pay up to 6x EBITDA today ($7.21/share), monetize the real estate via a sale-leaseback, sell the wholesale brands, lever the business 1-2x, and generate an attractive financial return. A sale-leaseback could potentially generate over $100M of cash proceeds, which along with the current cash balance, would allow the company to pay out over $4 a share to shareholders.
Management
- Management owns 17% of the company’s shares and has generally done a good job running the business. None of Management’s kids or other immediate family are involved with the business, and so the only option for an exit for management seems to be a sale.
Risks
- RET is exposed to general economic conditions and consumer confidence/spending in Canada
- Misallocation of capital
- Merchandising errors
- Increased competition
- Stronger USD currency compresses gross margins
- Sell-side coverage
- Sale-leaseback of its valuable properties
- Return of capital to shareholders
- Continued FCF growth
- The Reitman family decides to sell the brand to a retail-buyout PE firm
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