NBLY shares have significantly underperformed, despite the company executing well on its M&A strategy and having recently completed the transformational acquisition of the 100 store Rubicon chain. The shares, in fact are trading not far off the $17 IPO price, despite delivering solid growth. NBLY shares are currently trading ~45% off the peak valuation. Given its position as a truly defensive retailer, we think investors should be taking another look. It would appear that there is an outsized focus on transitory near term issues driving the underperformance. The pharmacist shortage, which is driving higher costs, will abate as immigration returns to more normalized levels. (Note the Canadian government just announced the hire of 1250 new employees to tackle the backlog of 1.3M applications and speed up the immigration process). Interestingly the pharmacist shortage is likely to result in more and more pharmacy owners taking the decision to sell their businesses which in turn will fuel NBLY’s primary growth pillar, M&A. We also believe that as economies open further, more and more people travel, attend events etc. we will see a gradual return of script count levels approximating pre-COVID levels. We see NBLY as offering a solid defensive play in the Canadian retail sector, especially given its 80% exposure to non-discretionary scripts. We reiterate our Sector Outperform rating with a revised $35 target price.
Q1/F23 revenue of $114.4M (+34% y/y) was higher than our $111.2M forecast by 2.8%. Revenue from acquisitions completed or stores opened in the last four quarters accounted for ~$27.9M (~96%) of the y/y increase. In the quarter, revenue from acquisitions combined with +1.8% SSS drove the growth. The number of prescriptions the company dispensed in Q1/F23 increased by 29.6% y/y reflecting acquisitions, while same store script volumes were up 0.4% y/y. NBLY continued to experience a lower level of new prescriptions vs pre-pandemic, especially in clinic pharmacies. SSS increased 2.6% and same store script volumes were up 1.3%. Script volumes are not anticipated to return to pre-pandemic levels in the near to medium term and we note this is an industry-wide trend.
In the quarter gross profit grew 31.5% to $42.4M, in line with our forecast of $42.5M. The increase was driven by higher y/y revenue from acquisitions. The Q1/F23 gross margin declined 70 bps y/y to 37.0%. The decline reflected a mix impact from acquired pharmacies. In Q1/F23, clinic format pharmacies accounted for 40% of the NBLY network and 40% of the company’s pharmacy revenue, compared to 32% in Q1/F22. Typically, margins in clinic locations are slightly lower given the mix of branded and specialty scripts. With the acquisition of Rubicon, the mix of clinic pharmacies in the network will approximate 34% in Q2 and as such this will provide a tailwind for the gross margin rate.
Q1/F23 Adj OG&A was $32.1M, an increase of 41.5% y/y. Store operating and general expenses increased by $7.3M or 37.8% in Q1. The increase primarily reflected incremental salaries, benefits, occupancy and other costs related to the number and size of acquired pharmacies. The increase also reflected incremental spend on wages associated with relief pharmacists’ wages and travel costs required to cover vacancies. The corporate, general, and administrative expense rate was 4.0%, compared to 3.3% prior year Q1. CG&A expenses totaled $4.5M, an increase of 63.0% y/y. The increase reflected public company costs. The consolidated Q1/F23 Adj OG&A rate was 27.2%, up 135 bps y/y.
Q1/F23 Adj. EBITDA was $11.3M, +11.0% y/y, with NBLY’s EBITDA margin declining to 9.8% from 11.9% a year ago (-204 bps y/y). EBITDA growth was primarily driven by the incremental profitability from acquisitions, partly offset by a lower gross margin rate due to the higher mix of clinic pharmacies in the quarter, higher public company costs, and higher relief pharmacists’ wages and travel costs as a result of vacancies in its store network.
Post the acquisition of Rubicon, NBLY’s debt leverage (net debt/PF adj. EBITDA) stands at approximately 3.3x, above the targeted 2.5x. However, NBLY is confident in its ability to fund its target level of M&A over the foreseeable future and its ability to delever the balance sheet over time. NBLY also indicated the pipeline is as robust as it has ever been, and they continue active discussions with potential targets. NBLY remains on track to deliver another 10 locations in F2023. NBLY emphasized they look to operators in smaller markets that act as significant healthcare providers in their communities and derive the majority of their revenue from prescriptions.