Good news ladies!
You know how I sometimes make jokes about a certain gender doing my laundry and making me a sandwich? Or when I ogle pictures of this gender wearing very little clothing? And there was even that time I gave all the ladies career advice, which, surprisingly, didn’t just tell you all to get paid to take your clothes off. And for all of that, I’m sorry. It has come to my attention that these jokes are sexist and possibly worse than licking pickle juice off a dirty hobo.
As an apology, allow me to spend an entire blog post talking about clothes. Well, not clothes specifically, but a way to invest in what I think is an undervalued clothing retailer, or, as I like to call them, clothiers, because I am some sort of fancy-pants. I also say words like boudoir or chrysanthemum or areola, because, again, I am a more advanced person than you. When the apocalypse comes, I will join the other smart people on the new planet.
Okay, that’s enough preamble. The company is Reitmans, and they sell clothes for ladies. All my female readers are squealing with glee right now. Can you gals keep it down? We’ve got a company to analyze.
Reitmans operates the following banners:
Reitmans – Mostly for middle aged ladies. I’d recommend it if you’re into cougars.
Smart Set – Casual wear for women in their 20s. I will start hanging out there, pantsless.
RW & Co – A clothing store for both men and women? Sure, if you’re living in some sort of bizarro world where dogs are married to cats.
Thyme Maternity – WHOOO! FUTURE MILFS!
Penningtons – For plus-sized ladies. Hey, more cushion, less pushin’.
Addition Elle – Also for larger ladies. I bet they like ice cream…
Combined, Reitmans has 923 stores open in Canada, as well as an additional 135 Thyme Maternity stores located inside certain Babies-R-Us locations in the U.S., which just opened over the last 6 months.
Okay, it seems reasonable so far. Ladies will always need clothes, Reitmans seems to do a decent job selling them. Why am I even analyzing this stock? Let’s look at a chart.
Yikes. The right side of that chart is falling faster than when Hans Moleman got hit in the groin with a football. (FINALLY, A SIMPSONS REFERENCE ON FINANCIAL UPROAR.)
So what’s going on? A couple of things have been hurting the company lately. First of all, business is kind of in the crapper. They closed some 30 stores during 2012, taking some hits to earnings in the process. Even after ditching the dead weight, same store sales are still slighty softer. Business isn’t great, but keep in mind that the underlying economy isn’t terrific either, so that might have something to do with the decrease in sales.
Another elephant in the room against the company is Target’s arrival in Canada. They’ve slowly opened stores since the beginning of 2013, and will continue to open stores over the next few years. There is no doubt Target will hurt the company a little, since their clothes are marketed as a slightly cheaper version of the clothes Reitmans has.
The company has responded, starting even before Target entered Canada. They spent $80M over the last year, mostly spending it on revamping some older stores, a new inventory management system, and getting their Thyme Maternity stores set up inside Babies-R-Us. Time will tell how these new stores are performing, but this expansion will increase store numbers by over 10%.
As you probably already guessed, earnings suffered because of all those cap-ex costs. 2012 earnings were basically cut in half from the year before, coming in at 42 cents per share. The problem with that is the company pays a 20 cent a quarter dividend. A little known fact is that if you invest in a company that only earns enough to cover half their dividend, one of those dividend growth investors vomits all over a flower. We’ll get back to earnings in a second. Let’s look at the balance sheet.
Even after a year of spending like a PF blogger buying shoes, they’re still sitting on nearly $170M worth of cash. ($2.62 per share) Book value is $6.26 per share, and debt is essentially non-existant. If you deduct the cash off the share price, you’re paying a hair over $6 for the business. They’ve been burning through cash over the last couple years as earnings have declined. They’ve also been paying the generous dividend and doing those renovations. There’s still lots of cash left, but the trend isn’t in the right direction.
They also lease a lot of their locations, since many of them are in shopping malls. This represents a significant commitment going forward. This also makes it difficult to close stores without waiting until the lease is up, but the company seems satisfied with their stores going forward. At least until I start hanging out at certain locations offering to be a change room attendant.
Here’s why I really like the company. I think 2013 (their 2014) earnings will easily surpass last year’s $0.42. I think $1.00 per share isn’t outside the realm of possibility. Here’s why.
Remember how I always stress doing your research? I found a very interesting piece of information from the annual report. Set your eyes to stun, Trekkies.
The company invested $84M in improvements last year, and are planning $44M this year. There are 64.5M Reitmans shares outstanding. That’s an additional $0.62 per share in profit just from spending less on capital expenditures. Suddenly earnings go up from $0.42 per share to $1.04 per share. Plus, the company has opened 135 new stores, and those stores should add 5 to 10 cents a share in additional profits. But let’s be conservative and say the company makes $1.00 per share profit this year.
Remember, once you strip out the cash, you’re paying a little over $6 a share for a business that could easily earn $1 next year. That’s pretty good. Oh, and you get a 9% dividend to wait while the market figures out this company is undervalued. Yes, there is a chance that same store sales continue to decline, but I don’t think earnings will collapse in any meaningful way.
You gals like buying clothes on sale, right? Maybe it’s time to buy the clothing company on sale. Even if it doesn’t perform as well as I think it will, it’s still a better investment than another sweater.