Reitmans chain on the rebound in competitive market
Fashion firm improves profitability, same- store sales, shuts weak banner
As one of the country’s biggest and oldest fashion retailers, Montrealbased Reitmans Canada Ltd. took a number of strategic steps to turn around its performance in the past fiscal year after four straight years of falling same- store sales.
The family run women’s apparel chain shut down its weak- link Smart Set banner and improved same- store sales and profitability, but the retailer’s ability to avoid the marked brand decline and failure of its peers in the industry — Jacob, Mexx, Comark — isn’t guaranteed.
“Cash flows have improved and we believe downside is limited, meaning value investors should feel compelled to take a look,” CIBC analyst Mark Petrie said in a recent note to clients.
“But we view excessively stiff competition from arguably more sophisticated global peers and a weaker Canadian dollar as ongoing and material headwinds.”
Reitmans had shrunk to 823 stores at the end of its most recent quarter, from 968 in 2010, as it closed its least productive stores. It shuttered the 55- store Smart Set banner completely last fall amid poor performance and now operates under the Reitmans, Penningtons, Addition Elle, RW & Co. and Thyme Maternity banners.
As a result, net earnings in the three months ended Jan. 31 were $ 4.4 million or seven cents per diluted share, compared with a net loss of $ 2.6 million ( four cents per share) last year. Same- store sales, an important metric in the retail business, increased 2.1 per cent.
Petrie, who rates the shares as a sector performer with a target price of $ 8, noted Reitmans exceeded his profit forecast, but gross margin return on investment indicates the company “continues to squeeze fewer gross profit dollars out of its inventory.”
Reitmans’ shares are around $ 7.25, a far cry from the $ 20 level it was trading near in mid- 2010.
Nevertheless, the analyst bumped up his fiscal 2016 forecast after a better performance in the second half of fiscal 2015 to a projected operating earnings improvement of $ 76 million from an earlier prediction of $ 73 million, and per share earnings of 35 cents, up from his earlier forecast of 30 cents.
“Reitmans is, and has been for some time, a cheap stock. Still, we are not getting overly excited about the performance of the past two quarters as the comparable quarters last year were quite weak, and we cannot confidently say we expect consistent growth in samestore sales and gross margin percentage,” Petrie said.
But Francois Parenteau, manager of Defiance Fund Ltd., believes Reitmans has growth potential as it seeks to improve performance in its namesake banner. The hedge fund has held a two- per- cent stake in the retailer since 2013.
“Our goal is not trying to buy the best retailer out there. Our goal is to buy shares that we believe trade at a steep discount to their intrinsic value and these shares are extremely, extremely undervalued,” he said.
“There is a huge margin of safety that comes from the balance sheet, $ 200 million in cash. The shares trade at 3.6 times trailing operating earnings. That is as cheap as I have seen in the retail sector for a company on such solid footing, a profitable company, with about $ 3 a share on its balance sheet.”