Reitmans: 24% Price Difference Between The Share Classes Is A Buying Opportunity

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Investment thesis

On January 25, I revealed successful my MP work that I’d taken a position successful a Canadian women’s clothing retailer named Reitmans (RET.A.CA) (OTCPK:RTMAF) (RET.CA) (OTCPK:RTMNF). It’s been a chaotic thrust arsenic nan marketplace valuation of nan institution has almost doubled since past which made this my second-largest position by far. Something different has happened complete nan past weeks arsenic nan value quality betwixt nan 2 classes of shares of nan institution has grown to 24%. In my view, Reitmans is still undervalued and location is very small quality betwixt nan 2 classes of shares which is why I switched my position to Class A shares. Let’s review.

Overview of nan opportunity

Reitmans is simply a family-owned clothing retailer pinch a 96-year-old history, and it presently has conscionable complete 400 stores successful Canada nether nan Reitmans, Penningtons, and RW&Co brands. Looking astatine nan financial capacity for nan past decade, Reitmans has been struggling to stay profitable and COVID-19 lockdowns forced nan institution to embark connected a restructuring that resulted successful nan closure of nan Thyme Maternity and Addition Elle banners, nan shutdown of 140 stores arsenic good arsenic nan firing of a 4th of each labor aliases astir 1,600 people.

However, this restructuring tin beryllium viewed arsenic a blessing successful disguise arsenic it enabled Reitmans to renegotiate unit leases astatine little value levels and adjacent unprofitable stores. In addition, nan institution paid only astir 50 cents connected nan dollar to settee indebtedness and liabilities. With COVID-19 lockdowns ending and Reitmans stores reopening, nan business seems to beryllium successful fantabulous wellness arsenic TTM operating income stands astatine C$40 cardinal ($29.9 million). The operating income separator is 5.1% which is simply a decent level for a clothing retailer.

Reitmans 10 twelvemonth financial performance

Seeking Alpha

Turning our attraction to nan equilibrium sheet, we tin spot that Reitmans had nary debts arsenic of October 29. The rate equilibrium stood astatine C$67.1 cardinal ($50.1 million) and I expect it to person accrued importantly by January 29. There are 2 reasons for this. First, nan vacation play is usually marked by destocking, and you tin spot that inventories fell by C$14.5 cardinal ($10.9 million) successful Q4 FY22. Second, inventories successful Q3 FY22 were accrued further to antagonistic nan effects of proviso concatenation issues. If inventories autumn backmost to C$119 cardinal ($88.9 million), nan rate equilibrium would beryllium astir C$107 cardinal ($79.9 million).

Reitmans Q3 FY23 equilibrium sheet


Reitmans has a marketplace capitalization of C$241.7 cardinal ($180.5 million) arsenic of nan clip of writing, which puts nan endeavor worth (EV) astatine C$174.6 cardinal ($130.4 million). If you see nan expected C$40 cardinal ($29.9 million) alteration successful inventories, we get C$134.6 cardinal ($100.5 million). Reitmans should people its FY23 financial study astir nan mediate of April and I expect nan yearly operating income to alteration to astir C$35-C$37 cardinal ($26.1-$27.6 million) considering nan full assemblage is dealing pinch costs inflation.

In my view, a profitable business successful a cyclical manufacture for illustration clothing unit should beryllium trading astatine astir 8x EV/operating income. Taking into relationship nan expected inventory decrease, Reitmans is trading astatine conscionable 3.9x arsenic of nan clip of penning which is why I deliberation nan institution is undervalued by a wide margin. In addition, Canadian plus guidance patient Donville Kent recently said that nan existent property assets of Reitmans successful Montreal could beryllium worthy C$240 cardinal ($179.2 million).

Looking astatine nan catalysts for nan stock value that we tin expect successful nan adjacent future, I deliberation that nan institution is apt to reinstate its dividend and could pull much organization investor liking from firms for illustration Donville Kent. In my view, plus income are unlikely.

Turning our attraction to nan stock value building of Reitmans, nan institution has 2 classes of shares. The quality betwixt them is that Class A shares person nary voting rights. Otherwise, they are beautiful overmuch nan aforesaid and person historically had nan aforesaid dividend payments.

Reitmans stock structure


You could reason that nan communal shares should beryllium priced higher, but I disagree arsenic their free float is conscionable 42.5% arsenic nan Reitmans family still has a mostly stake. One period ago, nan 2 classes of shares were trading astatine almost nan aforesaid level astatine astir C$3.00 ($2.24) but their prices person diverged importantly complete nan past fewer days. The communal shares are 24% much costly arsenic of nan clip of writing.

Reitmans stock price

Seeking Alpha

So, what’s nan logic down this situation? Well, I deliberation nan astir apt mentation is that Donville Kent aliases different organization investor has been focusing connected building a position done nan communal shares. On February 14, Canadian integer newspaper La Presse reported that Donville Kent Senior Vice President & Portfolio Manager Jesse Gamble revealed successful a telephone question and reply that nan institution had conscionable complete a cardinal Reitmans shares and that it made purchases arsenic precocious arsenic past week.

In my view, location is nary justifiable logic why communal shares should proceed trading astatine a premium to Class A shares and I expect nan spread to adjacent successful nan coming weeks. Considering some classes of shares person beardown momentum and Reitmans still looks cheap, I expect this to hap done an summation successful nan value of Class A shares. In position of this, I’ve sold my communal shares and bought Class A shares for a akin full price.

Looking astatine nan risks for nan bull case, I deliberation that nan awesome 1 is stock value volatility arsenic Reitmans is simply a microcap institution and nan trading measurement seldom exceeds 50,000 shares. For example, nan stock value reached C$3.00 ($2.24) successful March 2022 and past went down beneath C$1.00 ($0.75) by June contempt a deficiency of awesome news. I could besides beryllium underestimating nan ostentation unit connected costs and Q4 FY22 results are weaker than my expectations.

Investor takeaway

I for illustration a bully business turnaround communicative and I deliberation that organization investors are yet starting to return announcement of nan betterment successful nan fundamentals of Reitmans. I expect dividend payments to beryllium reinstated successful nan adjacent early and I’ve switched my position to Class A shares arsenic I deliberation that they connection amended worth astatine nan moment. In my view, nan quality successful nan value betwixt nan communal and Class A shares makes nary consciousness and I expect this quality to diminution importantly successful nan adjacent future.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

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