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Reitmans Is Very Cheap

Saj Karsan profile picture
Saj Karsan

As Reitmans (OTCPK:RTMAF) has seen declining same-store sales and reduced profitability, shares of the profitable retailer have been battered as of late, now down 50% from their year-ago levels. As a result, the company now trades for less than half of its sales, despite a strong net cash position representing one-third of the company's market cap. Furthermore, Reitmans is run by a management team with a strong track record that has implemented a number of initiatives to return margins to normal.

*Note that the company also trades in Canada under the much more liquid RET.A

The Business

Reitmans is a Canadian retailer of women's apparel, operating 900 stores under a number of banners including Reitmans, RW & Co, and Thyme Maternity. The large number of stores provides scale (e.g. marketing, technology and other costs are spread over a large number of units) while the various banners give the company options in terms of where it is receiving the best returns on capital.

This model has served Reitmans well, as seen by the company's returns on equity over the last decade:

Recent Problems

Also obvious from the above chart is that Reitmans' returns have come under pressure as of late. The company recently botched the roll-out of a new warehouse management system, which caused "serious disruption in the flow of inventory to stores." The company estimates the negative impact of this disruption at up to $15 million of EBITDA (the company earned $30 million in its most recent fiscal year).

Initiatives To Return Margins

Though shareholders don't like to see management make such egregious errors, it is worth pointing out that this is a fixable, rather than a permanent problem. Indeed, management claims "the company has addressed the issues related to the warehouse management system and continues to improve the flow of goods to the stores

This article was written by

Saj Karsan profile picture
Saj Karsan founded an investment and research firm that is based on the principles of value investing. He has an MBA from the Richard Ivey School of Business, has completed all three CFA exams, and has an engineering degree from McGill University. Visit his blog, Barel Karsan (http://barelkarsan.com/).

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Comments (3)

packur profile picture
Looks very interesting
good find!
Maarten Pieters profile picture

Thanks for the article.

A few notes.
1. Net Cash position
2. Recent problems

Net Cash position

For the latest quarter I see 147M of cash and 149M of liabilities.

Recent problems

As you mention the earnings were depressed because of problems with the warehouse system. It looks like the problems were solved and the earnings did not improved.

“The disruption resulted in estimated loss of sales and a corresponding decline in gross margin, earnings before income taxes and adjusted EBITDA between $7,000,000 and $15,000,000 in the third quarter of fiscal 2013. There was no significant impact in the fourth quarter of fiscal 2013. The Company has addressed the issues related to the warehouse management system and continues to improve the flow of goods to the stores and optimize system performance.”

This applied to the 3rd and 4th quarter of fiscal year 2013. Looks like the issues were solved as there was no significant impact in the 4th quarter of fiscal year 2013. The numbers of the 1st and 2nd quarter of fiscal year 2014 (earnings before tax: 10M combined) are significantly below the fiscal year 2013 figures (earnings before tax: 36M combined).

Cheers, Maarten
rob13546 profile picture
I think RET.A is a good pick Saj. I've been watching closely but I think it will get wacked further if they cut the dividend. That will be a great entry point if it happens.


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