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Jan 2, 2020

Canadian Retailers Still Look Strong - Revisiting 2017 Column On Alimentation Couche-Tard, Dollarama And Canadian Tire

by Richard Morrison

Richard MorrisonIn the March/April 2017 issue of Canadian MoneySaver, I described three Canadian retailers that appeared to be able to weather the dominance of Amazon.com: Alimentation Couche-Tard Inc., Dollarama Inc. and Canadian Tire Corp. The products sold at Alimentation Couche-Tard’s convenience outlets, most located in gas stations, are unlikely to be bought online, while both Canadian Tire and Dollarama, whose stores still see plenty of traffic, offer e-commerce sites where customers can order items for delivery.

In 2017, I expressed the view that Alimentation Couche-Tard was suited only for patient investors seeking long-term growth, and indeed it took until the fall of 2018 for the company’s shares to come to life, although they have since steadily outperformed the TSX Composite. Dollarama was described as being suited for only momentum investors, and since the spring of 2017 it has taken risk-tolerant investors for a volatile but generally profitable ride.

Thanks to its dividend, Canadian Tire has generated reasonable returns despite a lacklustre share price performance.

Despite launching e-commerce sites of their own, most Canadian bricks-and-mortar retailers have had little to offer their shareholders over the past two years. The share prices of retailers Indigo Books & Music and Reitmans (Canada) Ltd. have been in long slumps, while Roots Corp.’s shares had a miserable 2018 and have yet to recover. Hudson’s Bay Co.’s shares have also been in a bumpy long-term decline and the company may be taken private.

Investors who had given up on stores and bought shares of Amazon.com Inc. in the spring of 2017 would have doubled their money by late 2018, although the stock has been flat since then.

Here is an update on the retailers I mentioned in 2017.

Disclosure: My wife and I hold Alimentation Couche-Tard shares as part of a portfolio of 15 Canadian companies within our self-directed Life Income Funds.

Alimentation Couche-Tard (ATD.B)

Consumers shopping for gasoline, bread, milk, lottery tickets, cigarettes, vaping products (and eventually, marijuana) and other convenience items are likely to visit a store in person instead of ordering them online, regardless of the speed and efficiency of any delivery service. This means gas bar and convenience store operator Alimentation Couche-Tard is sheltered from the Amazon.com juggernaut.

Founder Alain Bouchard started with a single convenience store in Laval, Que. in 1980 and the company has since grown exponentially through shrewd acquisitions. As of mid-October 2019, Couche-Tard had a North American network of 9,815 convenience stores, 8,591 of which were housed in gas stations across Canada and the United States. The company had another 2,708 stores in Europe, with licensing agreements for stores in other countries. Globally, the company has more than 14,800 outlets operating under brands such as Circle K, Couche-Tard and Ingo.

Couche-Tard may eventually enter the retail market for marijuana. Last July, ATD announced it was acquiring a stake in Fire & Flower Holdings Corp., an Edmonton marijuana wholesaler and retailer with stores in Alberta, Saskatchewan and Ontario. In February 2019, ATD reached a deal with Canopy Growth Corp. to open a Tweed branded cannabis store in London, ON.

On November 26, 2019, Alimentation Couche-Tard reported results for the second quarter of its 2020 fiscal year. Net earnings were USD $578.6 million or USD 56c per share on revenue of USD $3.5 billion, up from USD $473.1 million (USD 42c) for the same quarter a year ago. When certain items are left out, net earnings would be USD $571.0 million or USD 51c per share, up 24.4% from the second quarter of fiscal 2019. The gains were driven by higher fuel margins in the U.S. and organic growth, offset by a higher tax rate and by currency fluctuations.

In 2017 Alimentation added privately owned Holiday Station stores to its U.S. network, and since then ATD has remodeled some outlets to match Holiday’s food model and store layout, where customers are routed through the food section, then the coolers and finally the impulse purchases section as they wait to pay. In a November 27, 2019 report, BMO Capital Markets analyst Peter Sklar said he visited some Holiday food pilot locations and as a result expects Alimentation Couche-Tard management to expand the Holiday food model throughout the United States. Mr. Sklar has a $49 price target and an outperform rating on the stock.

Investors who bought ATD shares in the spring of 2017 when it traded at about $30 ($60 before a two-for-one split last September) would have suffered had they sold a year later when the shares dropped to near $27, but the stock has climbed steadily since then and now trades at about $44. At this price, ATD shares trade at 19.4 times trailing 12 month earnings per share, 3.8 times book value per share but just 0.6 times sales per share.

Alimentation Couche-Tard has steadily increased its dividend. Last March, the company raised it by 25% to a quarterly payout of 25c per share, yielding about 0.6%. While the yield is modest, shareholders have benefited from the company’s share repurchases, which totaled USD $126.5 million in the second quarter. Share repurchases, often made when a company has excess cash and its board feels the share price is too low, have many benefits for shareholders. A buyback decreases the number of shares outstanding, which improves per share ratios such as sales, cash flow, earnings and dividend yields. Some companies buy back shares to help disguise weak performance, but this is not a problem at Alimentation Couche-Tard.

Dollarama Inc. (DOL)

Dollarama, Canada’s best known discount chain, has 1,250 corporate-owned stores where shoppers go for inexpensive kitchen utensils, stationery, cleaning products, toys, storage bins and other items priced below $4. Dollarama’s customers are unlikely to go online to order single items but may do so for bulk purchases. In January 2019, the company launched an e-commerce site where customers can order cases of its products and have them delivered or held for pick-up.

In an investor presentation in April 2019, Dollarama said it had opened 66 net new stores over the previous 10 years, and that it plans to have 1,700 stores by 2027. Further, the company said it has found the Canadian market to be underpenetrated compared to the United States, with 21,000 people per dollar store in Canada vs. 10,000 in the U.S.

Dollarama’s total shareholder return graph since the end of 2011 shows tremendous gains, prompting a three-for-one split in June 2018. The last three months of 2018 were disastrous for shareholders, however, as the stock fell from a split-adjusted level of more than $50 to near $30, on repeated reports of weakening results. In 2019 the shares rallied back to their early 2018 level.

Like Alimentation Couche-Tard, Dollarama has been buying back its own shares, aiming to repurchase about 15.7 million shares or 5% of the total outstanding between the middle of 2019 and mid-2020.

After its fiscal 2020 third quarter ended November 2019, Dollarama reported sales of $947.6 million, up 9.6% from the same quarter the year before. Comparable store sales were up 5.3%. Net income of $138.6 million or 44c per share was up from $132.1 million (42c) for the same quarter a year before.

Last August Dollarama closed a deal to buy a 50.1% interest in Dollarcity, a Latin American discount store chain, for a total price of between USD $85 million and USD$95 million.

Dollarama Inc. has been a superb investment, but the company’s shares are volatile. At $45, the stock trades at about 26 times earnings. Dollarama raised its dividend by 10% in March 2019. The current quarterly payout of 4.4 cents or 17.2c a year yields just 0.38%, making it okay for those seeking growth but unsuitable for investors who want dividend income.

Canadian Tire Corp. (CTC.A)

The iconic Canadian Tire brand is well known across the country. Canadian Tire has a chain of more than 500 stores, together with retail outlets operating under brands such as Canadian Tire Gas+, Mark’s, Sports Experts, National Sports, SportChek, Pro Hockey Life, Trio Hockey, Helly Hansen, Atmosphere and PartSource.

CTC has jumped headlong into the digital age, reporting more than $500 million in e-commerce sales in the 12 months to November 2019, the company said in a recent presentation.

Fully 70% of its purchases begin with what it calls a digital engagement, with 600 million annual visits to the company’s web site and 500,000 monthly app users, the presentation said. The company’s Triangle loyalty program, covering many of its retail branded outlets, has resulted in loyalty members’ shopping baskets being 28% higher than those of non-members, it said.

In November, Canadian Tire reported consolidated sales were up 1.0% in its third quarter or 2.7% if gasoline sales were left out. Diluted earnings were $3.20 per share, up 1.5%. The company also announced an operational efficiency program aimed at cutting $200 million in annual costs by 2022.

The annual dividend was raised 9.6% to $4.55 per share, the eleventh increase over the past 10 years. The dividend payout ratio is kept at about 30% to 40% of prior year normalized earnings, the company said. At a recent price of about $143, the dividend yields 3.2% and the stock trades at just 13 times earnings.

Canadian Tire has been steadily buying back its own Class A non-voting shares. The company repurchased $316.5 million worth of shares in 2019 as of the end of September and plans to buy back another $350 million in 2020.

Conclusion

Retailers in Canada and the United States have been hurt by Amazon.com (AZMN). Investors interested in the retail space have not made much profit from the online giant over the past year, however, as AZMN’s share price has been stalled at about USD $1,800 for the past year. Investors seeking some exposure to the Canadian retail sector should consider the companies revisited here. Alimentation Couche-Tard’s long record of shrewd acquisitions makes the company well suited to investors seeking growth, as does Dollarama. For more conservative investors, Canadian Tire appears to be the safest choice of the three.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca