Reitmans (RET.A)
An overlooked, undervalued, and refreshed women's clothes retailer.
Dear Readers,
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Overview
Reitmans is a Canadian retailer of women’s specialty apparel. Pandemic regulations required the firm to close more than half of its brick-and-mortar stores, stunting its business. This meant that Reitmans could not meet its credit obligations, and the firm filed for bankruptcy protection on May 19th, 2020. In a process overseen by Ernst & Young, Reitmans signed an agreement with its creditors to repay $95 million CAD. Further, as part of a restructuring effort, management shut down two unprofitable banners, namely Addition Elle and Thyme Maternity.
After officially emerging from bankruptcy on January 12, 2022, the firm is left with three profitable banners:
Reitmans specialises in women’s fashion for tall, regular, and petite sizes (241 stores);
Penningtons retails low-cost, plus-sized apparel (93 stores);
and RW&Co., which markets lifestyle brands to men and women with an ‘urban mindset’ (78 stores).
This puts the total number of stores at 412. Investors have little enthusiasm for old-school brick-and-mortar businesses with e-commerce taking the lead. However, I think there are several reasons that the firm does not deserve its extreme undervaluation.
Near-Term Upside
A return to normalcy should revive the firm’s financials. It appears that this move is already underway, with YTD sales up 21.4%, the gross margin up 7.8% (at 54.5%), and staff, distribution, plus administrative costs down 24.4% YoY. Moreover, YTD EPS rose to a $0.94 CAD gain relative to a $1.82 loss in the prior year period. In addition, the shutdown of the two unprofitable banners and a reduced debt load will support earnings going forward. Reitmans also has a presence in e-commerce channels; customers can purchase apparel through their website, implying that the firm is not maximally exposed to the risk of pandemic store closures. That risk is also fading with time as the vaccination effort progresses.
Revised Balance Sheet
Reitmans is exiting bankruptcy with $37.8 million CAD in net cash, access to a $115 million CAD secured loan facility, and an obligation to pay $95 million CAD to disgruntled creditors. Further, in the last twelve months, Reitmans brought in $42.9 million CAD in free cash flow. This shows me that the firm is not in danger of entering bankruptcy again, and will have cash available for either reinvestment or shareholder rewards down the line (share repurchases have occurred in the past).
Incentivised Management and Family Business
A substantial 10% of outstanding shares may be granted to management under the stock incentive plan, with insiders currently owning 2.4% of the firm. Reitmans was founded in 1926 by Herman and Sarah Reitman - the grandparents of the current CEO, Stephen Reitman, and the family has complete control over the company through a dual share structure. Class A shares have no vote, but the Common Shares do.
It could be argued that the family factor is a pro rather than a con; I doubt that the CEO wants to preside over the decline of this almost 100 year-old business, which may constitute a performance incentive in itself. Further, management appears not to balk at the idea of shuttering unprofitable banners or individual stores - making me confident that they can do what needs to be done to get the firm back on its feet.
Valuation
If we consider that the depreciation and amortisation (D&A) charges massively exceed actual capex - 2021 D&A stood at CAD $61 million compared to capex of CAD $6.2 million, with a similar pattern in 2020 - it is logical to value the firm based on its free cash flow (brick-and-mortar assets are the main cause of this disparity). Reitmans is currently trading at CAD $2.1, with CAD $0.88 per share in TTM free cash flow (CAD $0.72 in earnings per share) and net cash per share of CAD $0.77. That equates to a P/FCF of 2.4x and P/E of 2.9x, with peers at a median of 15.5x and 13.8x. It’s clear that this undervaluation is extreme, which is not surprising for a CAD $100 million market cap firm straight out of bankruptcy.
Catalysts
Release of the full-year results on April 21, 2022, which could highlight new, normalised earnings power.
Initiation of analyst coverage (unlikely).
I’d love to have a discussion - there’s not much information available for this company due to its size, so I’m relying primarily on the extreme relative undervaluation. Type your thoughts in the comments below.
Disclaimer: this write-up describes the author’s own research and opinions, and does not constitute investment advice, whether explicit or implied. Invest at your own risk and do your own due diligence. I currently hold a material position in the issuer’s securities.
Why logical to value using FCF, if they are massively underspending on CapEx?
EBIT a better metric?