Shares in Reitmans (Canada) Ltd. RET-A-X, which recently had been under court protection against its creditors, are down 33 per cent since its earnings release last Thursday. But while the retailer is no doubt a risky play for investors, the slide seems like an overreaction, especially given the large amount of cash on its books.
As a long-time Reitmans shareholder, I have several observations about the company’s recent performance and outlook.
Reitmans emerged from bankruptcy protection in late 2021 and was the beneficiary of an agreement to pay off most liabilities at essentially 50 cents on the dollar. As a result, there are many moving parts in the financial statements that make year-over-year comparisons difficult, compounded by the fact that government-based COVID subsidies expired during the most recent financial year.
So the fact that earnings per share tumbled to $1.59 from $2.93 year-over-year is not itself a cause for alarm. In fact, if the latest EPS of $1.59 were a reliable number, then the stock would clearly be a bargain at less than two times earnings. The current year’s earnings did not benefit from the restructuring accruals associated with the emergence from CCAA, but they did enjoy a sizable income tax credit rather than a deduction. If we tax income at 25 per cent, normalized EPS are around 70 cents. Still cheap at four times earnings, but not a steal.
By other historical measures, Reitmans remains undervalued: Book value per share at year end was $5.34, there was no bank debt outstanding, and cash on the balance sheet totalled $103-million, or $2.11 a share. EBITDA, a broad measure of available cash flow, was $57-million, up from $39-million the previous year. Sales for the full year were up 21 per cent at $800-million and e-commerce sales made up 28 per cent of the total.
With this as background, why did investors react negatively to the earnings release? There was some disappointment that with all that cash available there was no resumption of a dividend, nor was there any indication of a return to a full TSX listing from the Venture Exchange. More important, although fourth-quarter same-store sales were up 13 per cent, net earnings were down sharply at $27.5-million versus $97.2-million. Neither of these numbers are particularly meaningful: the recent period enjoyed a tax recovery of $31.7-million, because management now thinks they can utilize the tax loss carryforwards, while the previous year took in an $88.6-million benefit from the CCAA restructuring. Adjusting for these two non-recurring items suggests that the fiscal year just ended was a tougher retail environment, with a fourth-quarter loss of $4.2-million compared with a profit of $8.6-million a year earlier.
Perhaps the downbeat investor sentiment for Reitmans arose from the opening comments in the press release where the president referred to “near term headwinds related to the economic environment which impacted our performance in the fourth quarter of 2023 which may persist through the first part of fiscal 2024.” He may remain optimistic about the company’s competitive position, but some investors clearly were not inclined to stick around
In late December, 2021, I wrote an article suggesting Reitmans could be a good buy as it emerged from CCAA with an improved balance sheet and a consolidated store count. The stock at the time traded around $1.70 and my target was 80 per cent of the prevailing book value of $3.14, or $2.50. The stock has traded well above that target price during the past 12 months and I did in fact sell part of my position. The remainder I continue to hold although I suspect that it will be dead money for the next couple of quarters as investors try to get a handle on the real earnings power of the restructured business.
My assumption is that normalized EPS of around 70 cents represents a return on equity of 13 per cent. This deserves a price earnings multiple of at least six times and a price-to-book ratio of 80 per cent. Both of these imply a new target price of a little over $4. If the market doesn’t co-operate, maybe management will find a use for the $103-million in cash on the balance sheet and initiate shareholder-friendly dividends or buybacks.
Robert Tattersall, CFA, is co-founder of the Saxon family of mutual funds and the retired chief investment officer of Mackenzie Investments.
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