RBC analyst Irene Nattel picks two consumer goods stocks that are well-equipped to survive the pandemic and potentially flourish thereafter.
For the most part, consumer goods stocks have suffered during the COVID-19 pandemic, particularly retailers whose business is mainly conducted at physical rather than virtual locations. Although the threat of further restrictions loom, financial analyst Irene Nattel says there are still bright spots in the conventional retail landscape.
Ms. Nattel, based in Montreal, is managing director, global equity research at RBC Capital Markets, which she first joined in 1995.
Two of her favourite companies are women’s apparel chain Aritzia Inc. (TSX—ATZ) and multinational convenience-store operator Alimentation Couche-Tard Inc. (TSX—ATD.B), to both of which she assigns a hearty “outperform” recommendation. Ms. Nattel asserts that both companies are well-equipped to survive the pandemic and potentially flourish thereafter.
Looking to e-commerce to offset store closures
Although the analyst concedes that COVID restrictions are a persistent risk to near-term results, she argues that Aritzia has opportunities to extend market reach “and share of consumer wallet”.
The company reported third-quarter fiscal 2021 (period ended Nov. 29, 2020) results that were far ahead of both Ms. Nattel’s forecast and consensus predictions, supporting her faith in its business model’s sustainability. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $77.3 million were down 2.5 per cent year-over-year.
However, adjusted EBITDA bounced back admirably from $34.9 million in the fiscal second quarter and third-quarter boutique sales delivered 81 per cent of the sales they achieved 12 months earlier. Meanwhile, e-commerce sales jumped 78.5 per cent.
Since Aritzia does not pay a dividend, it can focus any free cash flow on growth initiatives, in particular e-commerce and omni-channel (that is, incorporating multiple shopping methods, such as live, by phone, online, etc.) capabilities, Ms. Nattel says. It held a cash balance of $174 million in the fiscal third quarter against adjusted net debt of $420 million, $92 million less than in the second.
While she is counting on rising e-commerce to offset the closure of 39 boutiques in Ontario and Quebec in the fourth quarter, the analyst expresses confidence that the company can eke out higher revenues and, profits, accordingly, from storefronts.
“We believe new stores and expansions both deliver compelling economics, with a payback period of approximately two years, driving forecast return on invested capital in excess of 30 per cent. Aritzia has never closed a store, in 30-plus years, due to poor performance, which gives us some comfort around unit rollout risk,” says the analyst. She also notes: “The current environment is likely to surface compelling real estate opportunities.”
Ms. Nattel underlines the company’s tight inventory control as well. “Aritzia’s merchandising strategy provides a high level of flexibility to adapt the offering to shifting consumer demand, critical at present as demand for office wear is replaced by leisure wear,” she says, adding that third-quarter inventory was down by $4 million year-over-year despite seven more stores being open.
Couche-Tard sent to the “penalty box”
Consumer retail stock Alimentation Couche-Tard hit headlines in mid-January when it bid US$19.6 billion (€16.2 billion) for major French retailer Carrefour SA, known for its big-box, ‘hypermarket’ locations.
The French government soon expressed its opposition to the proposal, citing concerns with food security. Couche-Tard and Carrefour quickly announced that they would not merge but have nevertheless continued discussions about operational partnerships, spanning such areas as fuel sales, combined inventory buying and product distribution in markets where they operate. Both companies’ stocks have suffered since.
Ms. Nattel says that although this global blue chip stock’s shares will probably stay “in the penalty box” for the time being because investors felt “blindsided” by a venture outside its core focus, the current valuation remains compelling at close to seven-year lows and her downside prediction for it. After listening to management defend the move in a Jan. 18 conference call, she says: “The Carrefour approach was clearly well-planned, thoughtful and designed for shareholder returns. ATD’s exceptionally clean balance sheet should enable it to pursue its strategic agenda, which we now know includes potential retail channel adjacency.”
Reflecting on the last 20 years, Alimentation’s acquisition playbook is remarkably consistent, the analyst asserts. Namely, it accelerates return on invested capital to a percentage in the mid-to-high teens in between one and three years with aggressive deleveraging thanks to sector-leading cash flow conversion. “In the case of Carrefour, Alimentation saw a path to strong shareholder returns underpinned by compelling hard synergies without the need for bold assumptions around more prickly areas of the business, notably a turnaround of hypermarkets.”
This is an edited version of an article that was originally published for subscribers in the February 5, 2021, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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