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Liquor Stores satisfies thirst for yield, but beware of hiccups

Looking for a liquid play on Alberta's oil patch? You might consider taking a swig of Liquor Stores N.A. Ltd.

As a retailer of wine, beer and spirits, the Edmonton-based company is in some ways a defensive bet. People consume alcohol in good times and bad. They're loyal to certain brands. And they'll usually cut other discretionary items before they deny themselves a relaxing glass of wine - or multiple shots of tequila - after a gruelling workweek.

Yet Liquor Stores' heavy concentration in Alberta, where 172 of its 236 stores are located, means its fortunes are also tied to oil prices. That was bad news when energy prices collapsed in 2008, but it's a good thing now that crude is back above $100 (U.S.) a barrel, creating more thirsty oil workers with money to spend in places such as Fort McMurray and Grand Prairie.

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"The Alberta economy is moving ahead a little quicker than the rest of Canada. That's beneficial to our business," chief financial officer Patrick de Grace said in an interview. "When the resource sector was suffering, it was noticeable in our resource-based liquor stores. The improvement is welcome."

Plenty of other challenges remain, however.

A former income trust, Liquor Stores converted to a corporation late last year and in preparation slashed its dividend by a third, to 9 cents a month from 13.5 cents previously. Even after the cut, the stock is yielding a rich 7.1 per cent, leaving some investors to wonder whether the dividend is sustainable, particularly if Alberta's economy were to slump.

"We're feeling [the dividend]is fairly safe," said Sheila Broughton, an analyst with PI Financial who has a "buy" on the stock. "They have to execute to be able to afford to pay their dividend, as any company that has a dividend does."


Last year, Liquor Store paid out slightly more than it made in distributable cash, a situation that clearly wasn't sustainable. However, based on Ms. Broughton's 2011 earnings forecast, the company should have a reasonable cash cushion this year. She expects earnings before interest, taxes, depreciation and amortization (EBITDA) to total $51-million or $2.26 a share which, after deducting interest and income taxes - some of which will be deferred - leaves a "worst-case scenario" of $34.7-million or $1.54 a share.

That would easily cover 2011 dividends of about $1.13 a share, which will drop to $1.08 a share in 2012 because the current year includes one month (January) at the preconversion dividend rate.

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Providing a further cushion, Liquor Stores recently announced a dividend reinvestment plan in which investors can choose to take dividends in additional shares, which would improve the company's cash flow.

With its conversion behind it, the company is now focusing on improving the performance of its existing stores and building or acquiring new ones.


While Alberta is by far its largest market, the company also operates stores in British Columbia and in 2008 and 2009 it made acquisitions in Alaska and Kentucky, respectively. On the fourth-quarter conference call in March, chief executive officer Rick Crook said the company may make "the odd strategic acquisition" in Alberta and is also eyeing growth opportunities in British Columbia in 2011 and 2012.

But "the majority of new stuff can come from the United States, particularly on the acquisition side," he said.

The U.S. expansion has not been without bumps. In a note, National Bank Financial analyst Trevor Johnson said U.S. sales came in below forecasts in the fourth quarter, with the nine stores in Kentucky accounting for most of the weakness.

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In Canada, the company also faces headwinds, particularly in B.C. These include tough comparisons with last year's sales during the Olympics, stricter blood-alcohol laws and consumer frustration over the new harmonized sales tax, said Mr. Johnson, who has an "underperform" rating and $14 target on the stock, which closed Wednesday at $15.18.

There are also questions about how quickly the company can grow given that its debt is already on the high side.

Liquor Stores' net debt stands at about $140-million, or roughly 3.2 times trailing adjusted EBITDA, RBC Dominion Securities analyst Tal Woolley said in a note. What's more, all of Liquor Stores' debt "needs to be refinanced in [fiscal 2012] consequently, we do not believe aggressive square footage growth is on the horizon," said Mr. Woolley, who has a "sector perform" rating and $15 price target.

The company "certainly has capital availability for smaller deals and greenfield development, but larger acquisitions might require an equity raise given the leverage and the timing of refinancing," he said.

Bottom line: Liquor Stores' dividend is probably safe, barring a major downturn in Alberta's economy. But given questions about the company's expansion, you may want to imbibe in moderation.

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About the Author
Investment Reporter and Columnist

John Heinzl has been writing about business and investing since 1990. A native of Hamilton, he earned a master's degree from the University of Western Ontario's Graduate School of Journalism and completed the Canadian Securities Course with honours. More

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