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Reitmans will be challenged to keep growing

Sales staff Andrea Barnswell at work at the Reitman's retail location at the Toronto Eaton Centre in this March, 2011 file photo. The country’s largest specialty apparel chain faced strong headwinds last year, ranging from high cotton prices and bad shopping weather, to less discretionary spending among Canadians.

Moe Doiron/The Globe and Mail/Moe Doiron/The Globe and Mail

Investors are hoping that Reitmans (Canada) Ltd. will close the book on last year's disappointing run when it reports first-quarter results Tuesday.

The country's largest specialty apparel chain faced strong headwinds last year, ranging from high cotton prices and bad shopping weather, to less discretionary spending among Canadians and the arrival of large international retailers, including Sweden's H&M and Spain's Zara.

Revenue, margins and same-store sales all slipped in 2011, while profit tumbled 47 per cent. The company had to cut prices to offset weaker-than-normal consumer spending and greater competition.

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The outlook for this year is brighter. Analysts expect that gross profit margin rose last quarter and that share profit increased to 9 cents a share, up from 1 cent a share a year earlier. The consensus forecast of 2.8-per-cent revenue growth is well ahead of the annual 2.2-per-cent increase that the apparel and accessories sector has averaged over the last five years.

But Reitmans' gains may prove temporary, according to Mark Petrie, an analyst with CIBC World Markets Inc. He thinks the retailer is benefiting from the demise of Zellers Inc., one of the company's main competitors. Longer term, fierce competition from Wal-Mart Canada Corp. Target Corp., Marshalls and other big names will force the Montreal-based company to increase promotions and come up with new ways to retain customers, he said.

"In our view, growth at Reitmans will be difficult, and is dependent on sharp marketing, appealing assortments and ongoing price competitiveness," Mr. Petrie wrote in a recent report.

Even though the company will be challenged to keep growing, its shares remain an attractive investment for those seeking income. The stock yields 5.6 per cent and Reitmans' solid cash flow and low debt mean the payout is sustainable, he adds.

Analysts praise the 86-year-old retailer's management and its dominant market position, achieved with seven banners that include Penningtons, Addition Elle and Thyme Maternity. With almost 1,000 stores across the country, Reitmans boasts bargaining power with landlords and a finely tuned supply chain that includes a purchasing office in Hong Kong. The company caters to the sweet spot of the Canadian market, which Mr. Petrie defines as the 20- to 50-year-old lower-middle to upper-middle income consumer.

Reitmans draws praise for its smart business model. The retailer avoids easy price comparisons by designing its own wares, a decision which also gives it better control over quality and inventory. It spreads its contracts among more than 25 suppliers, mostly in Asia, keeps capital requirements low by leasing all its store properties, and maintains a pristine balance sheet.

Reitmans' model has allowed the company to hold its ground as other Canadian apparel retailers stumble. Le Chateau, for example, reported an 8-per-cent decline in same store sales last year and suspended its dividend. The shares, which traded a year ago at nearly $10, recently sold for $1.35, a decline of 86 per cent. In comparison, shares of Reitmans have lost about 16 per cent during the same period.

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On Tuesday, investors will be looking for news on Reitman's big upgrade to its information technology system, which began more than a year ago. The project includes new merchandising and procurement software as well as an update of the warehouse management system. The revamp should help the company reduce costs, better positioning it to fight rivals, including Sears Canada, The Bay and Wal-Mart, Mr. Petrie said.

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