Hey, remember a few months ago when I talked about Reitmans and when I completely screwed up and said capex expenses affected earnings when they really only affect cash flow? There’s no need to click back and look at the comment section to see people smarter than me point that out. Let’s move on.
An intro, for those of you who aren’t familiar with the company. They operate women’s clothing stores under a few different banners, including Reitmans, Smart Set, RW & Co, Thyme Maternity, Penningtons, and Addition Elle. They’ve also expanded into the U.S., selling maternity clothes to Babies-R-Us, who have maternity sections in their stores, anxious to extract that baby shower money from mothers-to-be.
Things aren’t going well for Reitmans since the last time we checked them out. Sales in the first half of their 2014 were down 5.3% compared to the year prior, ending August 3rd. This is partially due to shuttering locations, but is mostly due to a botched launch of their new inventory system. This resulted in a huge reduction in earnings, falling to $0.12 per share for the six month period, compared to $0.42 a year ago.
Reitmans currently pays a $0.20/share quarterly dividend. At this point, earnings don’t even get close to covering the dividend, so the company is starting to use cash on hand to pay the dividend. Fortunately for them the cash hoard is healthy, at $2.28 per share, and this is even after the company invested more than $1 per share revamping their stores last year.
It’s probably about time to check out a chart. Here’s a 5 year one.
The stock is firmly in the toilet, even after I thought it was decent value at the $9 level a few months ago. But can it recover? I think it can.
First, let’s look at the balance sheet. If you strip out the goodwill and the intangible assets, the company has a book value of $5.83 per share, which unlike many other retailers, isn’t mostly tied up in real estate. (In fact, more than half of the company’s assets are current assets, easily converted to cash.) They have minimal debt and easily manageable lease commitments going forward.
Sales are starting to turn around too, as Reitmans recently reported total sales increasing 4.6% in August, and a 3.1% increase year over year for stores open at least a year. They continue to close non-performing stores, as well as increasing their presence in Babies-R-Us stores.
The company has also recently revamped their e-commerce sites, opening sites for Smart Set, RW & Co, and Thyme Maternity brands, which are distributed through the company’s main distribution center. Additionally, they’re selling Addition Elle via a third party website in New Zealand, and have partnered with Sears Canada to put Penningtons plus size in five stores as a trial. These are all positive changes.
During the company’s fiscal 2011 (ending in February 2011), they had operating income of $124M on $1.06B of sales, or approximately 12% net margins. I think the company is taking the proper steps to get back to profitability, meaning those 12% operating margins aren’t so out of line. The current market cap is $440M, meaning you’re looking at a company that, once they get back to normal profitability, can trade at 3.5x earnings. Even if they can only get half of that, to 6% margins, it still trades at 7x earnings, and that’s even before you strip out the cash, which is about a third of market cap this point.
Based on last year’s revenue of $1B, Reitmans is trading at a 0.44 price to sales ratio. This is an absolute steal when you compare it to some of their American competitors, like The Gap (a hair under 1), or Guess (pretty much the same as Gap). Neither of these companies have the balance sheet strength or the potential to increase earnings via improving operations.
Additionally, management owns over 10M of the 64M outstanding shares, so their interests align with shareholders nicely. Additionally, CEO Jeremy Reitman has held the position since 1975, so I think we can assume he knows a little something about the clothing business.
There are a few things I’m concerned about. The company has a dual class share structure, meaning the Reitman family controls the company without controlling a majority of the shares. There’s always the chance Jeremy turns into Frank Stronach and decides to pay himself a billion dollars a minute. Also, I’m concerned about the Canadian consumer, who is clearly stretched thin.
The dividend is a major concern too. The company currently pays $0.80 per year, a 12% yield on the current share price. That represents a $50M annual commitment going forward, and is likely to get cut if the company can’t turn things around in the near future. Try and act surprised when this happens. If the company does cut the dividend, the resulting sell-off could represent an interesting entry point.
Overall I like the stock, and you should probably assume I’m buying shares as you’re reading this.