Reitmans Canada Ltd RET-A
September 24, 2018 - 2:41pm EST by
grizzlybear
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 $M): -157 EBIT 14 18
TEV ($): 106 TEV/EBIT 8 6

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  • Retail
  • where'd the EBITDA go?

Description

$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

 

 

 

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

-          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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    Description

    $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

     

     

     

     

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    -          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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