From RBC March 11, 2016
Liquor Stores N.A. Ltd.
Improved flexibility; Price target to $10
Our view:
Liquor Stores N.A. Ltd. ("LIQ") reported Q4/15 results modestly
ahead of forecasts. We believe the dividend cut and plans to moderate
capex investment over the next 1-2 years strengthen the company's
financial position as it navigates a challenging operating environment in
western Canada. Revising price target to $10 ($11 previously); reiterate
Sector Perform rating.
Key points:
Revising price target to $10 ($11 previously); reiterate Sector Perform
rating
– Our price target is based on ~9x our 2017E EBITDA of $47MM
(~9.5x our $49.1MM EBITDA previously).
Dividend cut strengthens LIQ's financial position given headwinds, in our
view
– We view the 67% reduction in the annualized dividend ($0.36/
share vs. $1.08 previously) to be a prudent decision by LIQ management
in light of the ongoing economic headwinds in Alberta and opportunities
to re-direct the funds to high-return projects (i.e., store renovations). The
dividend cut will likely lead to near-term pressure on the share price as
retail investors exit the name; however,
the improved flexibility and
the
increased
institutional
ownership will be positive for the company over
the long run, in our view.
Restructuring and capex reduction likely moderated impact of dividend
cut on share price
– LIQ announced a restructuring of ~20% of the
positions at its Edmonton and Louisville offices (expected annual savings
of ~$2.5MM) and plans to reduce capex spend (delaying implementation
of Enterprise Resource Planning system and reducing the number of store
openings over the next 24 months). These initiatives provide for increased
financial flexibility over the next 1-2 years, and their anticipated benefit
likely helped moderate the impact of the dividend cut on LIQ's share price.
Comp sales in Calgary and Edmonton still growing
–
LIQ reported
Canadian comp sales of +0.3%, with strength in
Calgary, Edmonton,
and
British Columbia
partially offset by continued weakness in the
smaller resource-dependent markets in Alberta. Comp sales in some
rural resource-dependent markets declined between 5% and 15% during
the quarter. Although
basket size in these markets has remained stable,
the
transaction count has decreased. Given the transient nature of
the population in the resource-reliant markets, a portion of the laid-
off workforce has left these regions, which in turn has impacted
traffic/transaction counts.
Over the coming quarters, we expect LIQ to
increasingly leverage promotional activity to drive sales, particularly in the
larger Alberta markets where the company has the majority of its stores.
Estimate revisions
–
We have revised our estimates to reflect modestly
lower sales growth in H1/16 and lower gross margins given the higher
expected promotional activity.
Priced as of prior trading day's market close, EST (unless otherwise noted).
For Required Non-U.S. Analyst and Conflicts Disclosures, see page 6.
https://www.rbcinsight.com/WM/ResearchViewer/1924-407602-1/1654?docType=PDF&