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After 12 consecutive quarters of declines in same-store sales, Reitmans has posted a modest gain of 1.1 per cent. (Christinne Muschi For The Globe and Mail)
After 12 consecutive quarters of declines in same-store sales, Reitmans has posted a modest gain of 1.1 per cent. (Christinne Muschi For The Globe and Mail)

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Reitmans’ appeal for bargain hunters Add to ...

The December selling season has taken on an entirely different meaning at Reitmans Canada Ltd.

Sure, the women’s apparel retailer has some good deals for holiday shoppers. But the most vigorous selling at the chain may turn out to be among its investors.

When the S&P/TSX Canadian Dividend Aristocrats Index does its annual membership update on Friday after the close of the market, it will likely drop Reitmans. That will prompt fund managers who track the index to drop the shares.

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In addition, Reitmans has fallen more than 40 per cent this year, making it a prime candidate for tax-loss selling – investors’ practice of dumping losing stocks to offset capital gains on their winners.

These two forces could combine to make this a grim month for Reitmans shareholders. Investors would be well-advised to watch the shares as they head into the new year, however. The lows of December may represent an excellent entry point into the stock if the retailer can turn itself around.

First, though, let’s consider the index issue: Reitmans is the second-largest member of the aristocrats index. The idea behind the benchmark is to highlight Canadian companies that consistently raise their dividends. Once in, members can remain even if they hold their dividends steady for two whole years.

The clock has run out on Reitmans, as its dividend had been flat since mid-2010. The payout ate up an ever-increasing proportion of the company’s narrowing profits, making a boost unlikely. And, indeed, the company said last week it would cut its quarterly dividend by 75 per cent to 5 cents.

Money manager Lightwater Partners has been shorting Reitmans since August partly because of the index issue. Partner Jerome Hass believes funds based on the aristocrats index hold shares equal to 10 per cent of the company’s float, or 30 times its average daily volume.

Some fund managers who follow the aristocrats index may be able to sell in advance of the rebalancing, meaning the impact of the dropping of Reitmans could already be somewhat reflected in its share price. Mr. Hass, who covered some, but not all, of his short position before last week’s earnings announcement says, “You can say ‘the news is already baked into the price,’ but it never seems to be.” (David Blitzer, the chairman of S&P’s Index Committee, declined to comment on the changes that will be announced Friday.)

Certainly, there is good reason for the dismal performance of Reitmans’ stock price. Annual earnings per share, once easily above a dollar, were 19 cents over the 12 months ending in early November. Gross profit margins continue to contract. Same-store sales, a measure of revenue in locations open for at least one year, were negative for 12 consecutive quarters.

Until, that is, the quarter Reitmans just reported, when same-store sales rose 1.1 per cent. Granted, the bar was low, given the company’s past declines, but the number suggests the company may actually have an idea about what to do next.

“In our view, it is much too early to call this a fundamental turnaround,” says Mark Petrie of CIBC, who has a “sector performer” rating and $8 target price on the shares (about 30 per cent above current levels). But, he notes, “with shares below $6, this could prove an attractive entry point for value investors, though we do not see any fundamental improvements on the horizon to spark a higher price.”

Here’s what said value investors can focus on: The new, reduced dividend still represents a yield of 3.3 per cent, and is clearly more sustainable than the prior one. It will also help protect the $121-million on cash on the balance sheet, which makes up more than a quarter of the company’s $400-million market capitalization.

Reitmans’ price-to-earnings multiple looks high for the retail space, but cash-rich, low-debt companies typically get punished by that measure. Instead, consider that it trades close to its tangible book value (its assets minus liabilities), making it among the four cheapest of 45 North American apparel retailers by the price-to-book metric, according to S&P Capital IQ.

Its enterprise value – market capitalization plus net debt – is just 4.4 times the prior 12 months’ EBITDA, or earnings before interest, taxes, depreciation and amortization. No apparel retailer on the continent is less expensive.

It’s hard to believe the shares could get even cheaper this month. If they do, however, investors interested in holiday-shopping bargains should take note.

 

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