I initiated an opening position today in the retailer Reitmans Canada Limited (RET.A) at $18.18/share. Reitmans Canada Limited operates a network of clothing stores (around 935) specializing in women's & men's fashions and accessories. The company operates Canadian stores under the banners Reitmans, Smart Set, Pennington Superstores, RW & Co., Thyme Maternity, Addition-Elle, and Cassis. Brands and demographics written all over it, my kind of stock.
How It Fits
Reitmans will be added to my portfolio as the smallest company I own. With a market cap of only $1.3B, it is significantly smaller than most companies that I currently hold. Before adding RET.A I had a 10% weighting in consumer products; the addition should increase this to 14% joining Procter & Gamble (PG), and Scotts Miracle Gro (SMG) in this asset category.
Reitmans is a very old company with its roots firmly planted in Canadian business success, going back to 1926. The company has always been regarded as being well managed and seems to really know how to retail clothing. The diversity of banners above, and their ability to seemingly adapt to changing tastes and trends really sets them apart. They have the market cornered on clothing whether you are a businesswoman, on a budget, pregnant, a single guy, or a plus sized woman, Reitmans might be able to help you look the part. It is interesting to note that their Thyme Maternity banner is Canada's largest specialty retailer of maternity wear, and no doubt contributes well to net margins. Going forward Reitmans should continue to do what they do best as they diversify their lines, perhaps make acquisitions, and put up new stores.
One trend that they seem to be taking advantage of is the 'outlet store' set up. These banners are now starting to pop up all over the place, outside the traditional mall setting, which seems to be where the consumer is hanging out (near the big box giants Wal-Mart, Future Shop, and Home Depot, among others). A challenge for Reitmans recently has been it's attempt to revamp it's baby boomer banner, Cassis. Recently the company reported poor performance and a complete overall of the 12 stores, which make up a very small proportion of overall earnings. Reitmans also has a natural hedge against cross boarder shopping, in that they procure their goods in greenbacks, and turn around and sell clothes in loonies.
Leading Up To The Purchase...
Over the last six months Reitmans shares have really been dumped hard. The company announced some bad earnings which they blamed on unseasonably warm weather. Considering the stock was priced for some pretty rapid growth, and analysts had lofty targets, the stock was taken down from around $25 at a high to around $16 at a low. Perhaps value investors who made their money already, and growth investors fearing slowing growth got out. When the stock was trading down around $16 - $17 a few weeks ago I was very interested, but I decided to hold off and wait to see the next earnings report, as well as a dividend increase which was due.
The Current Situation & Valuation
The third quarter earnings report I was waiting for came in on December 4, and operating earnings were up 17%. Also, they raised the precious dividend 13% to $0.72/share. This was the confirmation I needed to get involved. The valuation got too attractive to pass up today specifically, as the shares were down about 4%.
As my model sees it, the company is currently priced as if they are going to grow earnings at a pace of about 6% going forward. In other words RET.A is mispriced by about 60%. This is based on a P/E of about 14x. This is too cheap for a phenomenal dividend grower, with $215B in cash, almost no debt, return on equity and assets in excess of 20%, and a recent record of earnings growth that blows your wool socks off. A P/E of under 13x for this quality, yield, and growth? That is a sale that gets my attention.
Obviously the market is pricing in some serious earnings growth deterioration, which could very well occur, but I doubt the company has overnight turned from a 14% earnings grower to a 6% earnings grower. If by off chance they did take that horrible step down the ladder of growth then I bought a fairly valued company, and my investment should appreciate by 10% per year (6% + 4%(yield)).
Oh yeah, did I mention my favourite part? Reitmans is yielding about 4.0% currently and their recent dividend history looks like this:
2003 = $0.10
2004 = $0.11
2005 = $0.20
2006 = $0.42
2007 = $0.58
2008 = $0.72 est
This represents a compound growth rate of dividends of a staggering 32%+.
Which leads me to believe that perhaps Reitmans is turning into a 'value' type stock instead of a growth stock. That is unless they continue to crank out the growth we've seen over the past few years and the yield slides back down below 3 points. Alternatively, their growth could really be slowing and might sit down in single digits for the foreseeable future, that is perfectly fine by me as I bought the stock under 13x earnings with a yield of 4%, so no high growth is really priced in today.
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