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Research Note - Reitmans Canada Limited (RET.A:TSXV, $2.24|N/R) - Strong Q3 And Continued Comparable Sales Growth

Reitmans reported better than expected Q3/23 financial results after market close on December 15th, 2022.  RET.A showed continued strength on the back of a strong Q2/23. Revenue grew on a YoY basis to $205.6M vs. our expectations of $190.6M, and up from $178.2M Q3/22 or 15%.  Gross margin improved to 57.2% from 56.8% YoY and was in line with our expectations. Gross margin was down slightly QoQ from 60.5% Q2/23. Adjusted EBITDA shrank on a YoY basis to $18M from $23.8M Q3/22 (with adjustments for IFRS-16:Leases). Comparable revenues including E-commerce were up 16.5% YoY. RET.A comps trade at an average 2023 EV/EBITDA multiple of 7.7x, while RET.A is currently trading at a 1.3X EV/EBITDA. 


Financial Results

RET.A showed another quarter of strong revenue growth as the retailer looks to be accelerating out of its CCAA restructuring. Revenue at brick-and-mortar locations was $151.8M and E-commerce accounted for an additional $53.8M. Total revenue YoY grew 15% to $205.6M from $178.2M Q3/22 and beat our expectations of $190.6M by ~8%. The beat comes on the back of same store sales growth and a stable E-Commerce business as a percentage of total revenue. As a result, we are adjusting our Q4/23 forecast to reflect a 15% YoY revenue growth rate, bringing our new Q4/23 estimate to $218.8M (up from $201.7M). We are forecasting 5% YoY quarterly growth for 2024 because of economic uncertainty and will review our expectations as we get a clearer line of sight moving forward.


Gross margin improved YoY to 57.2% from 56.9% Q3/22 but was down slightly QoQ from 60.5% Q2/23. Gross margin should stabilize as shipping and supply chain costs continue to stabilize. The benefit of cost stabilization from supply chains and shipping was partially offset by higher markdowns and promotional activity. Moving forward we are adjusting our gross margin expectations to 57% (up from 51%).


Adjusted EBITDA shrank YoY to $18M from $23.8M Q3/22 as higher wages and performance incentives ate into EBITDA margins. EBITDA margin was 9% vs. 13% Q3/22, and we expect the EBITDA margin to stabilize around 10% in the near term. Additional weights on EBITDA margin are higher credit card processing fees and rent agreements tied to percentages of sales performance. We are adjusting our expected EBITDA margins to 10% (down from 13%) until we have more clarity on wage increases and performance benefits moving forward.


Management Commentary

RET.A stores across all brands shrank by 9 YoY to 404 from 413 Q3/22. RET.A continues to assess location viability and takes actions to shutter any consistent underperformers. RET.A is seeing an increase in store traffic as COVID restrictions are all but eliminated. Average transaction increases,  decreases in the number of markdowns, and promotional discounting all aided in the growth of revenue despite the closing of the 9 stores YoY. Comparable sales YoY were up 16.5% in Q3/23.


E-commerce continues its strong contribution to revenue and now accounts for ~28% of overall sales.

20221216 - M Partners - RET.A - Q3 Financials
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