RTMNF - Donville Kent - Reitmans: +500% Upside From Current Prices
2023-11-15 06:20:00 ET
Summary
- Reitmans reported a quarter in line with expectations, despite a stock sell-off due to difficult year-over-year comparisons.
- Operating cashflow and total cash increased, indicating a strong financial position for the company.
- Reitmans has shown resilience during past recessions and has the potential for significant upside in valuation.
The following segment was excerpted from this fund letter.
Reitmans ( OTCPK:RTMAF , RET.A:CA, RET:CA )
We originally wrote about and included our analysis on Reitmans in our January 2023 and April 2023 newsletters. Recently the stock sold off after their reported quarter because of difficult year-over-year comparisons. This is a flawed way of approaching the results. The quarter was actually in line with our model and expectations. The main point to take notice of is that there were $20m of compensation costs expensed in 2023 that was based on performance in 2022.
By simply comparing year-over-year results, you’re not comparing apples to apples. We would suggest following the cash. Operating cashflow in the quarter was $37m and total cash increased $27m. The market cap is only $127m with $100m of cash on the balance sheet.
Considering the recessionary storm clouds, another assumption is that a clothing retailer is a risky investment. Reitmans is a value brand, and they have had resilient revenue because of the value they offer. In 2008-2009, during the worst recession in recent history, sales remained consistent, and profits were stable. If you were to apply how much they made per store in the 2009 recession to their store count now, the stock is trading on 3x earnings. Now they are even more streamlined, have a high percentage on online sales, and a rock-solid balance sheet.
We have updated our valuation tables and added the recent Chico’s women’s clothing takeout by Sycamore Partners that was announced in September. Private equity firm Sycamore Partners is paying $938m, which equates to 11x PE multiple. Reitmans has higher gross profit, operating margins, net margins, plus a better balance sheet.
Retailer Multiples
Reitmans Valuation Potential
| Valuation Method |
| 2023 PE Multiple Value per Share |
| Average competitor multiple |
| 13.5x $13.84 |
| Closest Canadian Competitor |
| 15.7x $16.09 |
| Chico's takeout multiple |
| 11.1x $11.38 |
| Average Reitmans multiple 2002-2013 |
| 15.0x $15.38 |
| Average |
| $14.17 |
From current prices, this suggests +500% upside and doesn’t take into account the large cash hoard, the completely owned office building and distribution center. The delta between where the stock trades and its intrinsic value is so large that it begs the question if something else is holding it back? To that end, we have sent a letter to the board because we believe the business is being run well operationally (day-to-day) but not at the board level (this letter can be found as an appendix).
Their approach to the capital markets and treatment of minority shareholders is poor and outdated. We believe by consolidating into a single class share structure, thus eliminating the no coattail clause issue, plus uplisting to the TSX and becoming more shareholder friendly will undoubtably help close the gap.
We continue to buy both classes of shares.
Reitmans is one of the most straight forward examples of the value that is available in this environment. We expect to be active in many more scenarios like this where companies should be taking advantage of the environment we are in and maybe need a little push to do so.
Appendix
DISCLAIMERReaders are advised that the material herein should be used solely for informational purposes. Donville Kent Asset Management Inc. ((DKAM)) does not purport to tell or suggest which investment securities members or readers should buy or sell for themselves. Readers should always conduct their own research and due diligence and obtain professional advice before making any investment decision. DKAM will not be liable for any loss or damage caused by a reader's reliance on information obtained in any of our newsletters, presentations, special reports, email correspondence, or on our website. Our readers are solely responsible for their own investment decisions. The information contained herein does not constitute a representation by the publisher or a solicitation for the purchase or sale of securities. Our opinions and analyses are based on sources believed to be reliable and are written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. All information contained in our newsletters, presentations or on our website should be independently verified with the companies mentioned. The editor and publisher are not responsible for errors or omissions. Past performance does not guarantee future results. Unit value and investment returns will fluctuate and there is no assurance that a fund can maintain a specific net asset value. The fund is available to investors eligible to invest under a prospectus exemption, such as accredited investors. Prospective investors should rely solely on the Fund's offering documentation, which outlines the risk factors in making a decision to invest. The S&P/TSX Composite Total Return Index, the S&P 500 Total Return Index, and the Russell 2000 Total Return Index ("the indexes") are similar to the DKAM Capital Ideas Fund LP ("the fund") in that all include publicly traded North American equities of various market capitalizations across several industries, and reflect both movements in the stock prices as well as reinvestment of dividend income. However, there are several differences between the fund and the indexes, as the fund can invest both long and short, can utilize leverage, can take concentrated positions in single equities, and may invest in companies that have smaller market capitalizations than those that are included in the indexes. In addition, the indexes do not include any fees or expenses whereas the fund data presented is net of all fees and expenses. The source of the indexes' data is Bloomberg. DKAM receives no compensation of any kind from any companies that are mentioned in our newsletters or on our website. Any opinions expressed are subject to change without notice. The DKAM Capital Ideas Fund, employees, writers, and other related parties may hold positions in the securities that are discussed in our newsletters, presentations or on our website. |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Donville Kent - Reitmans: +500% Upside From Current Prices