Shareholders get a bad hangover

B.C. move hits Liquor Stores N.A. stock

It’s been a while since shareholders of Liquor Stores N.A. had reason to pop the champagne corks.

The Edmonton-based booze retailer’s shares have lost a third of their value over the past year. At Wednesday’s closing price of $12.23, the stock has plunged 50 per cent below its 2008 peak, even as major equity indexes soared.

No wonder shareholders are feeling hung over these days. Unfortunately, there’s no magic pill to fix what ails the company.

Investors have been dumping the chain’s shares since the British Columbia government unveiled plans to allow grocery stores to start selling liquor by 2015. Ontario now seems eager to follow. The province is expected to allow the provincially owned Liquor Control Board of Ontario to set up kiosks in a handful of stores.

Since Liquor Stores doesn’t operate in Ontario, the province’s move is a non-issue. And it’s unlikely Alberta will join the parade to allow liquor sales in grocery outlets.

“Alberta has a very good model,” says Patrick de Grace, Liquor Stores’ chief financial officer. “I think it’s fair to everybody, it’s fair to the grocers, it’s fair to independents, it’s fair to guys like us. Everybody pays the same price for a bottle, there’s no cross-promotion allowed on products, (and) you can’t use liquor as a loss leader to drive your grocery business.”

Liquor Stores is feeling the competitive heat in B.C., however, where the retailer operates 36 of its 245 outlets. The rest are in Alberta (175), Alaska (22) and Kentucky (12).

Although key details of B.C.’s grocery store rollout plan remain murky, and the impact on Liquor Stores is hard to gauge, a lot of investors aren’t sticking around to find out. “I do believe most people just got caught up in the headlines and basically thought ‘Yep, grocery stores are all of a sudden going to be able to sell booze,’” says Pacific International Securities analyst Sheila Broughton.

Trevor Johnson, an analyst at National Bank Financial in Toronto, warns that there could be further downside ahead. His 12-month target price on Liquor Stores’ shares is just $11, 10 per cent below the current price.

“We don’t know exactly how it’s going to pan out in B.C., but by opening up liquor distribution to grocery stores, I think there’s probably going to be a negative impact on Liquor Stores,” he says. “When it’s actually implemented it could be less onerous than what I’m suggesting, but we don’t know. And with the dividend being so tight — their payout ratio is around 85 to 90 per cent — if there’s any additional pressure in any of their markets, whether it’s B.C., Alberta, Alaska or Kentucky, you could see some pressure (to cut) the dividend. And that’s first and foremost.”

Liquor Stores CEO Stephen Bebis, who was hired last May to get the company back on a growth track, has been keeping a low public profile. Attempts by the Journal to reach him for comment Wednesday were unsuccessful. But the former president of Home Depot recently laid out a seven-point plan to drive future growth. The plan includes beefing up the management team— an issue he recently addressed with a flurry of senior appointments — as well as investing in information technology, store upgrades, marketing and expansion in the U.S.

“We anticipate that the positive earnings impact from the plan will be achieved starting in 2016,” he said last month, when the company released its 2013 results.

“Until then, we expect that our operating margins will be temporarily reduced as we implement these initiatives. We are confident that the short-term investments will be well worth the long-term gain.”

RBC Capital Markets analyst Sabahat Khan estimates Liquor Stores will have to invest $16 million a year over the next two years on store upgrades, branding and new technology to carry out its growth plan, plus $25 million annually in dividend payouts.

That’s likely to force the company to boost its borrowing, but with less than half of its $150 million credit facility drawn down, he figures that should still leave plenty of room. He carries a 12-month target of $14 on Liquor Stores’ shares.

Broughton, the most bullish analyst on the street, figures Liquor Stores is doing the right things, and its growth strategy will eventually pay off.

Her target price for the shares is $17 — nearly 40 per cent above the current price.