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