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Why investors should try Reitmans on for size

Summer shorts and tank tops aren't the only things on sale at Reitmans. After a plunge sparked by brutal first-quarter results, the stock is a compelling bargain that might even attract takeover interest, some analysts say.

Montreal-based Reitmans (Canada) Ltd. is one of this country's most conservative retailers, both in terms of the value-priced fashions it sells and the frugal way it manages the business. The company keeps a close watch on costs, has virtually no debt and carries cash and marketable securities of about $248-million – roughly $3.73 a share – on its balance sheet.

That ample cash cushion gives it a buffer to ride out economic downturns, fund expansion and pay a generous dividend, which currently yields about 5.4 per cent. Thanks to ample free cash flow in good times, the company has also raised its dividend steadily over the years – the last increase coming a year ago.

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"This is one of the best management teams in retail, in our opinion," said John Morris, an analyst at BMO Nesbitt Burns.

Yet those positives were quickly relegated to the back racks when investors looked at Reitmans' ghastly first-quarter numbers. Hammered by poor weather, high gasoline prices and a late Easter holiday, sales for the quarter ended April 30 sank 7 per cent. Because the company was forced to slash prices to clear out inventory, profit plunged 96 per cent to one cent a share – far below the consensus estimate of 24 cents.

Underscoring the depth of investors' despair, the shares – already under pressure amid fears about the arrival in Canada of the Target chain – fell in five of the six days after the results were released on May 31, hitting lows not seen since September, 2009.

"Q1 was very disappointing," said Versant Partners analyst Neil Linsdell, who cut his price target to $19 from $22 and downgraded the shares to "neutral" from "buy."

Yet there are reasons to believe that Reitmans' shares – which rebounded more than 2 per cent Thursday – may not stay down for long.

In an interview, chairman and chief executive officer Jeremy Reitman said sales have started to turn around with the arrival of more favourable weather. While May was a lousy month, with same-store sales down 8 per cent, "the last 10 days or so have been quite good, given the change in weather," he said.

The company – whose banners include Reitmans, Smart Set, RW & Co., Penningtons and Addition Elle – is still clearing excess inventory, but "we're working our way through it," he said.

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Takeover Target?

In a research note, RBC Dominion Securities analyst Tal Woolley said Reitmans has several options for creating shareholder value, including acquisitions, share buybacks or pursuing "strategic alternatives."

Asked whether he would consider selling the company, Mr. Reitman – who turns 66 in July – said he would explore that option "under the proper circumstances."

"We were quite pleased to see the amount paid for Forzani by Canadian Tire . That put good numbers up on the board," he said, referring to Canadian Tire Corp. Ltd.'s $26.50-a-share offer for Forzani Group Ltd. – a 50-per-cent premium to Forzani's market price before the deal was announced.

It's Cheap

Even without a sale, Reitmans shares are attractive, analysts say. Given Reitmans' financial flexibility, the dividend is safe even if the economy were to take a turn for the worse.

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And the stock is fundamentally cheap. If you subtract the cash per share on Reitmans balance sheet from the share price, the stock trades at an adjusted multiple of about nine times next year's estimated earnings.

Mr. Woolley, who has an "outperform" rating on the stock, said the second quarter will also likely be tough as the company clears excess inventory. But he said Reitmans is exploring acquisition opportunities which could benefit the stock.

It could also find itself on the receiving end of a deal.

"With improved credit conditions and [Reitmans'] strong balance sheet and cash flow generation, it is not impossible to believe that [Reitmans] itself could make an attractive purchase for financial players back in the market," he said in the note.

For his part, Mr. Reitman wouldn't say whether any discussions have taken place.

"We have a duty to our shareholders to look at any possible opportunity," he said. "We don't comment about that at this point in time. It's just not an event we would talk about."

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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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