A shopper enters the Heartland Reitman's Store in Mississauga, Ont., Jan. 15, 2015.J.P. Moczulski/The Canadian Press
If you look carefully, one struggling Canadian retailer this week finally gave its long-suffering investors something to cheer about.
Reitmans (Canada) Ltd. (RET.A-X) issued a press release Tuesday stating that creditors had approved a proposal to accept a $95-million payment as full settlement of all claims affected by the Companies’ Creditors Arrangement Act plan originally issued in May, 2020. The agreement has to be sanctioned by the court on Jan. 4, 2022, which is presumably a formality. The proposal was first presented to creditors in late November when the company also announced that it had an agreement with Bank of Montreal for an asset-backed loan facility of up to $115-million.
If you haven’t been closely following this iconic Canadian retailer, you won’t recognize that this cryptic press release represents the final step in a value recreation process that suggests the stock is significantly undervalued at the recent price of $1.70.
To my regret, I have been following this value trap for more than 30 years.
When my mother visited from England, she always enjoyed shopping at Reitmans, so I knew that the chain would never qualify as a leading-edge, fashion-forward retailer, but the company held a preferred share portfolio almost as big as the market capitalization of the entire company. In other words, it was a value situation that Ben Graham would have appreciated, so I continued to hold the stock and purchased more from time to time at lower prices to reduce my average cost.
As recently as February, 2019, the company balance sheet showed $112-million in cash plus another $50-million in marketable securities, for a total of $2.56 a share. Later in 2019, the company initiated a substantial issuer bid for its own stock at $3 a share and shrank the share count by 23 per cent.
I didn’t tender.
After all, why would you sell shares back to a company for not much more than the cash value on the balance sheet and get no value at all for the operating company?
Reitmans used all of the marketable securities to pay for the buyback, but entering 2020 prior to the COVID outbreak, the company still had cash per share of $1.83 and a book value of $3.89.
I soon had my answer as to why the $3 buyback price was a good deal. On May 19, 2020, Reitmans filed for protection under the CCAA, and I assumed that I was looking at a 100-per-cent tax writeoff.
To my surprise, the company switched its listing to the TSX Venture Exchange and continued to file financial reports with regulators, the most recent covering the period ended Oct. 30.
Management clearly took decisive action after filing under the CCAA.
Two banners were closed entirely: Thyme Maternity and Addition Elle, leaving 413 Reitmans, Penningtons and RW & Co. store locations to generate $178-million in revenues for the latest quarter. Earnings per share (currently untaxed) from continuing operations were reported to be 45 cents, but there were many moving parts that will not be repeated, such as government wage and rental subsidies, and the reversal of previous restructuring charges. We certainly shouldn’t annualize this number, although it does suggest that the company has been right-sized for now.
Turning to the balance sheet, the company secured interim financing for use during CCAA in the amount of $60-million, later reduced to $30-million, and none of this was used.
Even more remarkable, the company has $87-million in cash and equivalents on the balance sheet or $1.78 a share. Common shareholder equity has been dramatically reduced during the restructuring and now stands at $1.69 a share.
Finally, we can tie the contents of the press release to these financial statements. The balance sheet has an item described as “Liabilities subject to compromise” in the amount of $186-million. It is made up of trade payables, disclaimed leases, pension liabilities for senior executives, and termination benefits.
If this is the entire amount addressed at the creditors’ meeting on Tuesday, then the liability will disappear at a cost of $95-million and shareholder equity will benefit by $91-million, creating a new book value of $3.55 a share.
When dealing with a high-risk situation, such as Reitmans, a third-party endorsement of the financials would be reassuring. In this case, the CCAA works in our favour. The monitor of the process, Ernst and Young, provides continuing reports that are freely available on the internet. The latest covers the period from Sept. 12 through Dec. 4. It reports that sales and cash flow are running ahead of budget, the interim financing remains unused, and the cash balance is up to $101-million, or $2.07 a share.
With all this turbulent history, where should Reitmans stock trade as it emerges from CCAA? At $1.70, the stock is trading at less than 50 per cent of estimated book value and about 15 per cent of sales. If annual revenues stabilize at $600-million and the after-tax margin only reaches 2 per cent, then earnings per share would still come in at 25 cents.
Assuming that the company is now right-sized, we need to recognize that it will never achieve the same valuations as Aritzia Inc. and Lululemon Athletica Inc. Maybe another struggling retailer, such as Roots Corp., is a more realistic comparable. It trades at 75 per cent of book value, which, if we applied to Reitmans’ book value ($3.55), would suggest a price target for the latter of $2.70 a share, or about 11 times earnings. That is a 60-per-cent gain from the recent price and I would have a small profit after a 30-year holding period. I will not be calculating my compound annual rate of return.
Full disclosure: The author owns shares of RET.A-X.
Robert Tattersall, CFA, is co-founder of the Saxon family of mutual funds and the retired chief investment officer of Mackenzie Investments.
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Robert Tattersall