Reitmans: Surviving CCAA, And Equity Is Undervalued

Summary

• Reitmans is going to exit CCAA with its equity intact.
• Reitmans took the opportunity to restructure its business operations, and it is now a profitable business.
• Reitmans is trading at a depressed valuation for some obvious reasons.
• But I think investors are being more than fairly compensated for these risks.

JHVEPhoto/iStock Editorial via Getty Images

Reitmans Canada (OTCPK:RTMAF) is dual-listed (Canada & US). All figures in the article are in CAD unless noted otherwise.

Situation Overview

Reitmans is a Canadian retailing company, specializing in women's clothing. The company operated several store brands, including Reitmans, R.W. & Company, Penningtons, Addition-Elle, Thyme Maternity, Cassis, Smart Set and Hyba. It was founded in 1926 by Herman and Sarah Reitman, in Montreal, Quebec, Canada.

On May 18, 2020, Reitmans filed for CCAA since without the ability to restructure its operations, it would not have the necessary liquidity to ensure the viability of its operations. Reitmans entered CCAA with $361 million in assets, $109 million in trade liabilities, $14 million of gift card liabilities, and $24 million of pension liabilities. Most important, Reitmans did not have any secured creditor looking to foreclose on its assets, which made the survival of its equity possible.

While under CCAA protection, Reitmans closed Thyme Maturity and Addition Elle banners and renegotiated lease terms. As result of conservative forecasting and store traffic improvement post COVID restrictions, Reitmans has always tracked ahead of its plan budget. As of December 18, 2021, Reitmans holds ~$111 million cash, or $33.3 million ahead of the forecast.

Source: Monitor Report

Reitmans' creditors approved the Plan of Arrangement and plans to exit in January 2022. Under the Plan, Reitmans is going to distribute $95 million to its creditors in full and final settlement of all claims in total of ~$186 million.

Investment Thesis

1. Operation Investments

As a result of shutting down unprofitable banners, renegotiating lease terms, and lapping of restructuring costs, Reitmans SG&A expenses decreased by $67.6 million or 24.4%, for the year-to-date FY2022 (February to October 2021). Sales improved by $83.0 million, or 21.4%, primarily due to the easing of COVID restrictions. For the most recent two quarters, Reitmans generated ~$30 million EBITDA per quarter, and it seems to be a good run rate to use so long as severe COVID restrictions are not put in place for any prolonged period of time. I believe Reitmans should print another solid quarter for this holiday shopping season. In short, Reitmans utilized the CCAA to rationalize its brands portfolio and cost structure, and it's going to come out of CCAA a profitable business.

2. Valuation

Adjusting for the $95 million distribution against ~$186 million liabilities, Reitmans has a tangible book value of $3.83 per share. Reitmans is currently trading at 0.5x of tangible book value per share (TBVPS). The book value is likely higher accounting for the holiday shopping season. The book value should also grow as cash builds up on the balance sheet. Reitmans is also trading at 1.1x EV/FY2022 EBITDA and a FCF yield ~30% (FCF excludes change in working capital.

Obviously the valuation is depressed because (1) Reitmans is technically still in bankruptcy and (2) it's now a TSX Venture-listed company so it will not get much institutional attention going forward. However, I believe the company should be able to generate a decent amount of free cash flow and that the fundamental value of the business will increase over time.

Source: Q3 Financial Statement & Author Adjustments

Risks & Why Opportunity Exists

There are a lot of reasons investors would pass on Reitmans. To start, it's still technically in CCAA proceeding (although it's pretty much guaranteed that this process will wrap up in January 2022). It's an old-fashion brick-and-mortar clothing-store operator. It has a dual-class share structure. The management (aka the Reitman family) is not the best operator in the business. There could always be the possibility of another deadly COVID variant that forces the government to put people under lockdown again. However, I take comfort in the fact that I'm purchasing a business that's fundamentally better, generating positive free cash flow, at 1.3x EV/EBITDA. The current depressed valuations simply don't reflect the improved fundamentals.

Conclusion

Reitmans' conservative balance sheet pre-COVID enabled its equity to survive CCAA without any dilution. While the stock has gone up 3.5x in the past six months, I believe the stock is still undervalued. At just over $100 million market cap, the stock should double to get to its pre-COVID market cap of >$250 million. I'd argue the fundamental value of Reitman increased from closing unprofitable banners and cost restructuring, which should enable Reitman to print consistent positive EBITDA quarter over quarter.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of RTMAF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Double S Capital]

The financials looks pretty good to me. Debt free now. Kind of need the mgmt to do the right thing here.

[philweird]

@Double S Capital The numbers were spectacular and believe that this has continued into the current quarter which is their strongest of the fiscal year. It's quite conceivable that they can accumulate the market cap in cash in the coming months. It's been quite some time since Reitman's business has performed this well.

[Gilead Investments]

@Double S Capital Pretty good seems to be the gross understatement of the decade.

[Double S Capital]

@Gilead Investments I try not to celebrate too early...but cash being a major portion of the market cap is interesting :P

[Stripes Capital]

Looking at last CBRE reports on Montreal Industrial Stats, the current combined value of Reitmans' two buildings alone is over $132m now. On top of that we can add the value of unused land around the distribution center for an extra $28m, for a total of $160m of real estate value. $160m of real estate value provides a backstop value of $3.14/ share, as long as the company stays net debt negative.

This is before adding any premium for the fact that the distribution center will be a 5mn walk away from the Bois-Franc Station on the REM line in Montreal. (rem.info/...) Any piece of land around the REM stations have seen their value explode since Montral traffic dynamics will be transformed by this huge mass rapid transit system. The value will probably keep going up with the REM construction advancing.

From my point of view, this company is providing investors with 2 value plays, the real estate sit-and-wait side of it and the ongoing rebirth of a profitable retail business. An optimized capital management strategy would probably be to break this company into two separate entities: a real estate holding company and a retail business renting the facilities from it. That would prevent the potential value destruction/subsidization from one business to the other.

Looking forward to see the next rounds of results.

[Stripes Capital]

Talking about results, Canadian clothing stores are having a record year in 2022. Sales number hit 5-year record high in feb, March, April, May and June this year. Curious to see how/if Reitmans benefitted from that trend in Q2

[Jamm Systems]

@NickRR My question is- does the company care about investors?

Where's the catalyst to unlock those values?

[Stripes Capital]

@Jamm Systems To your first question, I dont think we need the Reitmans family to care about investors since they are the biggest shareholder group by far. Interests are aligned with investors. Difference is probably that they probably have a longer view than outsiders and probably don't pay much attention to the stock price fluctuation in the short-term. But at the end of the day, everyone needs a liquidity event. Which brings me to your second question.

I see at least two possible catalysts. The first, in the short/medium term, is capital allocation. If the ongoing turnover is successful, as it looks to be so far (next results will be telling us), the company being debt-free will start generating massive free cash flows vs its current share price. Hopefully, they will start paying a dividend or buying back shares, as they start doing in H2 2019 at $3/share.

The second possible catalyst is a take private transaction, which will most probably happen if the stock price vs fair value gap keeps widening. At current prices/volumes there is no liquidity for the Reitmans family or other investors. At some point, they will have to create a liquidity event, not because they care about external investors but for themselves.

In the meantime, a buy-and-hold patient investor can collect shares for less than 50% of the current NAV of the real estate, plus taking a flyer on the retail business. For whoever have an investment horizon bigger than 12 months, it can look like an appealing investment opportunity.

[Jamm Systems]

Adjusted EBITDA for the latest quarter $9.9 million. It's not so bad for the worst quarter of the year... It's a 6.5% EBITDA margin for the quarter, but I assume again this will be their worst quarter of the year. What does everybody think? Or is retail so dead rn that the better question is- does anybody care?

[philweird]

@Jamm Systems I also thought the quarter was as good as we could expect. I assume that freight costs cut into the Ebitda margins. Based on this release, the company is trading at about 1x ebitda/ev (except that investors might see lease obligations as debt) and you get $100m plus of Real Estate for free. The economy might be slowing in subsequent quarters, but there’s no denying the ongoing undervalued nature of this company. But it’s always been that way.

[Jamm Systems]

@philweird Hey Phil, thanks for the thoughts! There's undervalued and then there's 1x EBITDA! I guess that investors just have no confidence at all in management.

[philweird]

Reitman's 4th quarter and Full year numbers looked great on the surface, so I felt the need to compare it to the previous numbers before IFRS 16 came into existence. Seeing that their best year in the past 5 was 2019 year end of $923m of revenue and $56.1m of Ebitda and the share price was in the $4/range (with 30% more outstanding shares). For fiscal 2022, they reported $662m of revenue and a Ebitda number of $94.8m on far less stores.

However to properly compare, I removed $38.6m of lease obligations (under IFRS 16 leases get put into and inflates Ebitda), approximately $22m of gov't incentives (which are a one-time event) and add back what looks like $12.2m of restructuring costs (also a one time event). That takes the Ebitda number to $46.2m.

I am also very interested in efficiency of the business in terms of Ebitda margins and based on this assessment, margins for 2022 came in at 7%. Their best year in the past 5 (2019) was 6% and most years came in the 5-6% range. Now compare this to their peers such as Roots and/or Aritzia and/or CATO (which is a US listed security that is almost identical in terms of capital structure, insider ownership, net cash, real estate holdings and style of clothing.

Aritzia and Roots report double digit ebitda margins yet Roots trades at 3x ebitda/ev as does CATO. Aritzia has a double digit ebitda multiple.

Considering that Reitman's has net debt of approximately $4.5m after paying out $95 to settle CCAA, owns Real Estate valued north of $100m, I get the following:

$1.40/share x 48.9m outstanding shares = $68.9m + $4.5m of net debt = Enterprise Value of +/- $73m. This results in a Ebitda/ev multiple of 1.58x, plus you get $100m of Real Estate. The shares outstanding have been reduced from 63.3m to 48.9m due to a large buyback in July 2019. Further, it seems reasonable that they will create a cash balance by this year end in the $15 - $20m range.

My biggest concerns are:

1. Since the company has had almost two year clean up through CCAA where they closed unprofitable banners, renegotiated almost all leases and sold off unwanted inventory, I would like to see a 10% Ebitda margin.

2. Senior Management are getting older yet still control the company through a multiple voting share structure, so they can't be challenged.

3. They have always lacked in terms of shareholder relations and that doesn't look like it is going to change any time soon.

4. The usual recession, bad markets etc

Ultimately though, no company should be valued under 2x Ebitda and a proper valuation closer to 4x would produce a share price in excess of $4. Going forward, we should reasonable account for a net cash balance as well, suggesting that the enterprise value is even cheaper.

Be interested in others take on this business.

[Double S Capital]

@philweird Thanks for your comment.

On the EBITDA calculation, I get somewhere around $30mm

Gross Margin - Sales Marketing - Admin Exp + D&A - Lease Expense = $52.7mm. Further reduce this by ~$23mm for gov't funding I get ~$29.9mm, which translates to ~2.5x EV/EBITDA.

(very end of the day for me so my math brain might not be working properly so do let me know if disagree).

I do agree that Reitsman is dirt cheap no matter how you look at it. The dual share structure is a concern but at the time of my purchase the cheapness overrode this factor.

I also agree that they should be able to build cash over time but unfortunately we don't get to tell them how to use that cash. Not sure how much they are spending on the new marketplace venture.

Finally, of course this is a discretionary spending so in a recession their sales will go down rather quickly. However, I do want to acknowledge that through CCAA they were going to turn this into an actual profitable business. It's not a high quality predictable business but you are not paying much for it.

Let's keep the conversation open!

[NumbersFirst]

@philweird In my opinion Reitmans is in a much better position than it was in 2019. Renegotiated leases, leaner head office, etc. Be careful trying to compare 2019 to now using EBITDA. There were so many moving pieces with Covid it created a reset.

In retail capex is a real expense. Ignoring depreciation can give a skewed impression. Reitmans unveiled a beautiful new concept store at Carrefour Laval in 2019.

“The new concept is really an integral part of the transformation. We started transforming Reitmans two years already by changing the brand perception and elevating the product. The store itself needed to be more exciting, more noticeable and needed to also fill the gap caused by omni-channel expectations. This concept aims to create a seamless experience from the omni-channel benefit to the in-store experience”

In my opinion the company needs to first buy back stock through an NCIB, second continue to reduce store count and third renovate stores. Management should be spending half their time working at locations or doing customer service. Reitmans almost has a monopoly on older plus sized Canadian women.

Tangible Book Value is around $5. Reitmans needs to be less promotional if they want to elevate the brand. Megan did that with Roots. If you compare Roots in 2019 to today its like a completely different business. In 2019 there were lots of cheap T shirts on special to get foot traffic which was followed by promotions on core items like jogging pants and top.

I thought RET Q4 was going to be stronger that it was. I feel like management pushes too hard on unit growth so they end up over ordering inventory and need to run promotions to get it out the door. This lowers gross and operating margins.

[philweird]

@NumbersFirst Hey thanks for the response. Perhaps the biggest problem here is with management and their ability to adapt. However, the CCAA process should have yielded a better Ebitda margin than we are currently seeing in my opinion. 1st quarter numbers will be out on May 30th. So we'll see how that goes.

[NumbersFirst]

How I would like to see Income statement from launch

Revenue
Retail
Marketplace
Total

Retail is traditional onmichannel sales. Revenue is retail sales price. The second, is Marketplace where revenue is Reitman mark up on third party goods sold.

COGS
Retail
Marketplace
Total

Cost of Goods Sold are the direct costs in producing apparel and servicing 3rd party vendors. COGS does not include general selling, marketing and advertising expenses or head office senior management.

Retail Cost of goods sold are materials, shipping to Canada, warehousing costs.

Broken out Marketplace will have better gross margins however a lot of the costs will be buried in head office expenses as there are a lot of senior executives working on the project part time.

I could be wrong and Reitmans may just be the company that can compete Amazon who has a track record of prioritizing long term customer value creation over short term profitability. Amazon has the strongest ground game out there and is the king of retail logistics. Eg Amazon opening robotics fulfillment center in Alberta creating more than 1,000 full- and part-time jobs. The new robotics fulfillment center, set to launch in 2022, is more than 600,000 sq ft.
They spend ungodly amounts on shipping and get the best rates. Shipping costs are rising.

[Double S Capital]

@NumbersFirst Reitmans won't take on the shipping responsibilities for third parties in their marketplace.

[NumbersFirst]

@Double S Capital so basically Reitmans ends up with a digital landlord, looks like an online version of the Bay and can't compete with the Bay shipping from multiple departments?

I don't see how this benefits a Reitmans customer? Especially the customers who during the pandemic got Amazon Prime with free shipping.

In my view the only reason Amazon hasn't crushed companies like Reitmans is the Amazon Marketplace merchandizing is much weaker. Its much harder to establish an apparel brand solely online. People have been burned in the past ordering a low quality garment which looked great in pictures. A percentage of them don't return it. Trusted brands are more important online.

[Double S Capital]

@NumbersFirst to be clear I'm not sold on the idea either but there's nothing I can do, I guess except for selling the shares.

The idea is that they have a core customer base who often shop on their website, these people buy other stuff as well (not necessarily more garment), so might as well pick up that sales at low cost to Reitsman, since revenue above the fixed cost of running the platform is pure margin. They'd better pick some great partners to make sure they don't shoot themselves in the foot and tarnish their own reputation.

[NumbersFirst]

Right now the Canadian retail landscape requires a laser like focus that only the best Omnichannel companies can provide. Each province has their own Covid regulations. There are product selection, supply chain disruptions, labor shortages, inventory management and weather.
Reitmans competitive advantage is their geogrpahic customer base in times of uncertainty and disruption. Zara and H&M don't do a great job competing for Plus sized older Canadian women.
Having 4 distinct seasons one can easily see how product selection (what Reitmans decides to retail) is closely connected with the weather and distribution. If a shipment is delayed by a couple of weeks towards mid winter the company can find themselves liquidating merch in spring. This effectively lowers gross margins.

All too often retailers grab a shiny new object and get distracted. Their core business suffers, margins decline and customers go elsewhere. I wonder if this is the fate instore for Reitmans.

[NumbersFirst]

"Offering a compelling omnichannel experience used to be the bleeding edge of retail. Now it’s a requirement for survival.
Retailers need to step back and consider the underlying drivers of value for their specific business. Otherwise, with multiple approaches and technologies to choose from, and acute margin pressures, retailers can invest in the wrong thing and quickly fall into a downward spiral that can destroy value." McKinsey

Given Amazon is the predominant marketplace is it wise to go down that path? Does Reitmans have the resources to pull it off? This will be resource intensive in the beginning.
Which type of company will Reitmans attract?
Likely early on marketplace costs and revenues get consolidated into financial statements. If non Reitman marketplace gross margins are 15% to 30% it will look like company has lost focus.
I could see the marketplace working if other brands wholesale to Reitmans and they give the omni channel experience that Amazon can't.
Any thoughts?

[Double S Capital]

@NumbersFirst I don't think it's going to be that resource intensive to operate it other than some ongoing software/platform cost.

I would be concerned if not for the fact that Reitsman already does online sales in a meaningful way. I think the risk is in who they choose to bring onto the platform. They'd better be careful as their reputation is on the line. Although third-parties will be fulfilling orders, consumers might still blame Reitsman if the shopping experience is not pleasant.

How I can rationalize this move is that, they've carved out a core customer segment (+size women), and if they can figure out what else their core customer segment likes to buy and bring them onto the platform, it should be a low-cost/low-risk way to increase the topline. Margin profile should increase overall (provided that they don't just discount their stuff online, which to my point earlier, they already run online sales somewhat successfully, so I'm not too concerned) since over and above the fixed cost of software/infrastructure, it's should be pure margin for Reitsman.

I think overall net positive but happy to hear the other side from anybody.

[NumbersFirst]

@Double S Capital I am very skeptical regarding gross and operating margin profile increasing. Could you give me an example of an omnichannel retailer successfully transitioning to an online marketplace out of the gate?

Net shipping costs are large portion of Amazons overall expenses and they have increased over time. Amazon has highly profitable AWS what does Reitmans have? Not sure taking on Amazon out of bankruptcy is best idea.

Imagine all the time and energy Reitmans executives need expend on curating with merchants coming and going. Merchants want access to Reitmans customer base which is older plus sized women. Essentially "free" brand advertising. Eg "Pretty Shoe co" is just online and their Canadian sales are quite low per capita compared US so their plan is to join RCL for a year so Reitmans customers get to know their brand "Pretty Shoes". After a year they plan on dropping RCL to recapture the lost margin. Obviously they don't tell Reitmans executives this as the executives are also looking at "Fantastic Shoe co" as well. Its a curated collection so not every shoe company can join the marketplace.

I would think that Reitmans management would treat shareholders like partners and at least put a presentation together for the annual meeting to get shareholders on board before announcing. Their arrogance is astounding.

[NumbersFirst]

“Reitmans launching the new RCL Market in the Fall of 2022. Powered by Mirakl, the industry's first and most advanced enterprise marketplace SaaS platform, RCL Market will offer handpicked quality value products offered by partner brands.”

Does anybody have any insight into why Reitmans would want a digital landlord?
What are the long-term economic characteristics of the Mirakl marketplace? My concern is gross margin compression over time as Reitmans will have no control over the marketplace algorithm.
Is this a calculus of short term sales and new customer acquisition vs long term loss of some flexibility and margin? I am really not sure what to make of this given the company should be laser focused right now on Omnichannel retail given supply chain challenges and physical store management under changing Gov't regulations (ie Quebec was closed on Sundays in Jan and still 50% capacity etc).
Seems like Reitmans employees need to do the heavy lifting here by recruiting partners. I can't help but wonder if that is a productive use of time? Why doesn't management have a quick presentation for shareholders outlining the costs vs benefits as this takes the company in a new direction...

[snagglepuss000]

but what about taxes? seems like the FY21 annual says there was 20.5 million of NOLs at the end of january (correct? seems low given the equity was preserved. I see ~100m of cumulative losses since beginning FY20).

With 120m ebitda and LTM D&A of 50m, that's basically around 70m of taxable income. if so, Reitmans will be paying taxes at ~26.5% soon ... about 18.5m/year

120.0m ebitda
-67.0m NTM rent (per 10th monitor report)
-21.0m capex
-18.5m taxes
=13.4m FCF (=$0.28)

[serenecapital]

@snagglepuss000 doesn't ebitda account for rent?

[LevelUpValuation]

@snagglepuss000

I agree, corporate tax is missing from the valuation, but with pre-tax net cash flows of c.45m for only 14 weeks according to the monitors report, including rent and some capex, a full year pretax FCF for 52 weeks of 31.9 seem too low to me (13.4+ 18.5 corporate tax= 31.9). I guess we must wait and see the next few quarters to get a clearer picture.

[snagglepuss000]

@Sraja not under the latest IFRS rules. Basically, they capitalize the leases as a "right of use" asset and this asset gets depreciated over time. So I suppose that depreciation charge might not exactly line up with actual cash paid for rent in any given period. I'm reasonably sure they paid ~65m in rent during the LTM, whereas D&A was ~50. Anyway, on the cash flow statement there is a line item for "repayment of lease obligations" in cash from financing which was 36m in the LTM. So the difference of ~65-36=19m is likely baked into cash from operations ... i think!

If anyone has figured this out, I'm all ears

[LevelUpValuation]

I think you are right. Good website traffic for their 3 brands in q4 as well (. Q4 eps should be in the range 0.3–0.4 + I suspect a 90m in reversal of the 185-95 CCAA settlement. So that’s about their entire market cap. in accounting profits next quarter… Deep value case

[Gilead Investments]

Good article. I'm long here and plan on a short write up. Also think the @NumbersFirst estimate is a good guess. I figure revenue numbers should be ballpark right, but I'm assuming a wider range on the bottom line between about .30 and .60 depending on gross margins. It looks like they have pulled about 10 million a quarter out of lease expense which is significant.

[Multipy]

Do they disclose their breakdown between brick and mortar vs online sales? I can't seem to find that in their filings.

[NumbersFirst]

Reitmans got court approval yesterday. I am forecasting Q4 sales of $205M and EPS of $0.48. The company is in a very strong position with the right sizing of it physical stores. Recapture is over 25%! QC and ONT having Covid issues during Jan and Feb which is great for Ecommerce sales (over 30% at one point). Jan is always the worst month. I believe Canadian Omnichannel retailers will outperform in 2022 as consumers need retail therapy. CapEx will be higher in 2022 but refreshed stores will give comfort to consumers. Reitmans needs to manage inventory better and cut back on large promotions like 50% off sales.
Catalysts
1) getting out of bankruptcy. done
2) strong Q4 sales and EPS. very likely
3) uplist to TSX
4) small dividend

2022 will likely have higher revenues and EPS (I expect $1.60) compared to 2021 with Covid fatigued comsumers looking to the mall for enjoyment. A lot of people have gained weight and need to update their wardrobe.
Even with an outsized CapEx spend the company should have normalized earnings around $1.20 in 2023 and beyond.

[Double S Capital]

@NumbersFirst thanks for sharing your thoughts. Curious where did you see the recapture rate?

[NumbersFirst]

@Double S Capital Recapture rate based on my banner sales estimates vs actuals and store count over time with ecommerce. This is not fixed in stone due to Covid.

[NumbersFirst]

@Double S Capital I love a situation like this. I have backed the truck up on the stock so I am talking my PA here but you can tell the pros are no where to be found yet. Just look at the free money for arbing the non voting vs voting stock $2.19 vs $2.82 vs volume traded. still for the home gamers. this not investment advice speak with an advisor.

[Tschurin]

@Double S Capital Am very glad you are posting articles again. The last quote for the symbol RTMAF is on September 29th. Does it have a new stock symbol?

[Double S Capital]

@Tschurin I'm honestly not too sure about the US listed one but for the Canadian one it's the same. The equity is going to ride through CCAA. It was moved to the venture exchange however.