Call Start: 08:30 January 1, 0000 8:52 AM ET
Reitmans Canada Limited (OTCPK:RTMAF)
Q1 2025 Earnings Conference Call
June 19, 2024 8:30 am ET
Company Participants
Andrea Limbardi - President, Chief Executive Officer
Richard Wait - Executive Vice President, Chief Financial Officer
Conference Call Participants
Jesse Gamble - Donville Kent Asset Management
Edward O’Flynn - Parma Investments
William Kim - Presidio Asset Management
Operator
Good morning everyone. Welcome to Reitmans Canada Limited 2024 Fiscal 2025 First Quarter Earnings Call.
After Management’s remarks, this call will include a question and answer session. To join the question queue at that time, you may press star then one on your telephone keypad. In the interests of time and to allow as many as possible to ask questions, please limit yourself to one question and one follow-up question. Should you need Operator assistance during the conference, you may signal an Operator by pressing star then zero.
Before turning the call over to Management, listeners are reminded that today’s call may contain forward-looking statements within the meaning of applicable securities laws. Forward-looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements. For additional information, please consult the MD&A for this quarter and the Company’s other filings with the Canadian securities regulators on SEDAR+. Reitmans Canada Limited does not undertake to update any forward-looking statements. Such statements speak only as of the date made.
I would now like to turn the call over to Andrea Limbardi, President and CEO of Reitmans Canada Limited. Please go ahead, Ms. Limbardi.
Andrea Limbardi
Thank you Operator. Good morning everyone. I am so pleased to host our first earnings call as President and CEO of Reitmans Canada Limited. This was on the top of my to-do list as an initiative to enhance communications with our shareholders, so I’m happy to be on the call with you this morning, as is Richard Wait, our Executive Vice President and Chief Financial Officer.
Yesterday afternoon, we reported our first financial statements and MD&A are available on our website and have been filed on SEDAR+. We also posted a slide presentation on the Events and Presentations page of our website. That page can be found under the Financial and News heading. If you are following along with those slides, we’re going to get started on Slide 4.
For those of you who are not familiar with me yet, I thought I’d quickly go over my background, which includes over 20 years of experience in operations, customer service, merchandising, marketing, strategy and digital. Prior to joining Reitmans Canada last September, I served as President at Indigo, where I led their corporate strategic portfolio, digital transformation and customer teams. I was also the founder of Thoughtful.co, which was an online gifting platform that was designed to make finding a meaningful gift easy. Education-wise, I have an MBA from Concordia University’s John Wilson School of Business.
Moving onto Slide 5, as most of you likely know, we’re one of Canada’s largest specialty retailers and we have three brands. At the end of the first quarter, we had a total of 392 stores, 227 Reitmans-branded stores, 85 Pennington Penn locations, and 80 RW&Co. stores.
I’ve now been on the job for about 10 months. During this time, I have had the chance to thoroughly evaluated our Company’s strengths, challenges and opportunities. From everything I’ve seen, this is an exceptionally well managed Company and, in my opinion, is one of Canada’s best kept secrets. We need to share more about our story and the meticulous care we take to ensure our products meet our customers’ needs. I believe our strategy to focus on our core strengths is crucial for our resurgence.
Our expertise lies in delivering unmatched quality, style and fit at accessible prices across Canada. I see tremendous potential for us to expand our brands and capitalize on the strong customer loyalty we have. In the coming months, we will refine our growth plans to capitalize on the favorable positioning and sustained differentiation of our brands: Reitmans, Penn, and RW&Co. Our ultimate goal is to drive strong profitable growth for each brand in fiscal 2025 and beyond, and while our first quarter is typically our softest quarter of the fiscal year, this past first quarter has us off to a solid start.
On Slides 7 and 8, we highlight some notable points for the first quarter, which I will discuss now. Despite higher interest rates and inflationary pressures that negatively impacted consumer spending, we experienced stable revenues and improved margins during the quarter. Significant contributions came from Reitmans fashion denim Paris collection campaign, the Birds Papaya collaboration, and the successful men’s business at RW&Co.
During the quarter, we continued to focus our long term strategic road map and the modernization of digital technology at our distribution center. Back in the third quarter of last year, we implemented a new robotic system in the distribution center to accelerate processing times. We benefited from this in the first quarter, and we’re on track to deploy a nationwide point-of-sale system in all our stores across the country in fiscal 2025.
On Slide 9, you can see our historical store count as well as our capital allocation priorities for fiscal 2025. While our store count has come down in recent years due in part to the pandemic, we are focused on driving profitable growth. We see opportunities to selectively and strategically expand our footprint in all three retail brands. New store openings and investing in store renovations is among out top capital allocation priorities, along with the continued modernization of our business, including digital technology and infrastructure. We have made capital expenditures of $6.3 million so far in fiscal 2025 and have budgeted $32 million for the year, and we have the runway to grow with a strong cash position and no debt.
With that, I will turn the call over to Richard to discuss our first quarter financial results. Richard, over to you.
Richard Wait
Thank you Andrea, and good morning everyone. Before I get started, please note that all comparisons I will be discussing are for the first quarter ended May 4, 2024, against results for the prior first quarter ended April 29, 2023. Also note that all dollar amounts discussed are in Canadian currency.
Looking at our top line on Slide 11, our net revenues for the quarter were $165.7 million, unchanged with Q1 of 2024 but was achieved with 14 fewer stores than last year. We did notice an increase in sales dollars per transaction despite the challenging economic conditions. Comparable sales, which include ecommerce net revenues, were down 4.6%, primarily due to decreased online traffic. Sales of product through RCL Marketplace, which launched a little over a year ago, did not contribute significantly to the top line as we continued to develop partnerships and curate offerings. Retail store activity accounted for 75.4% of net revenues in Q1, while ecommerce made up the remaining 24.6%.
On Slide 12, you can see the $5.1 million increase in gross profit dollars. At $93.9 million, our gross margin rate was 56.7%, up 310 basis points quarter over quarter. The improvement is mainly attributable to reduced promotional activity and changes in the product mix sold. It is noteworthy that the gross margin rate achieved in Q1 is only second to 10 years ago. Recognizing that this was on a lower sales dollar volume, we remain encouraged as we continue to focus on delivering both top line and gross margin dollar improvements.
Our selling, general and administrative expenses for the quarter were $95.1 million, up $2.7 million or 2.9%. The increase was largely due to an approximate 9% increase in rent expenses and higher store operating costs primarily attributable to store personnel costs. Rent expenses should stabilize as we have secured longer term lease arrangements.
On Slide 13, you can see the improvements in our bottom line Adjusted EBITDA and results from operating activities in the first quarter. Net loss improved $2.3 million to $1.5 million or $0.03 per share versus a loss of $3.8 million of $0.08 per share in Q1 of last year. Adjusted EBITDA improved $2.1 million to $0.9 million despite higher operating costs. The improvements in net loss and Adjusted EBITDA were attributable to a $2.4 million increase in results from operating activities, which was primarily due to higher gross profit in the quarter.
ROA for the quarter was negative $1.2 million compared to negative $3.6 million the prior year. Q1 is typically the weakest of quarters, yet excluding two years impacted by CCAA, this is the best Q1 in over 10 years when measuring both ROA and bottom line.
Turning quickly to our balance sheet, at the end of the quarter, we had working capital of $153.4 million compared to $139.7 million at the end of the first quarter a year ago. We exited the quarter with cash of $98.9 million and inventory of $127.6 million, and our revolving credit facility was completely undrawn at the end of Q1, providing us with additional flexibility if needed.
That concludes my review of our financial results. I’ll turn the call back over to Andrea.
Andrea Limbardi
Thank you Richard.
On Slide 16, we have a few highlights for our outlook for the rest of fiscal 2025. We know that the current economic environment is impacting Canadians. Increases in rent, mortgages, interest rates and food prices are affecting consumers, and we anticipate that economic challenges will likely persist in fiscal 2025. Nevertheless, we feel that our stores will continue to successfully navigate these conditions due largely to our strong brand equity, while offering a high level of quality, fit and style at very reasonable price points.
We are uber-focused on driving profitable growth across each of our three brands for fiscal 2025 and beyond. To support this growth, we will continue to modernize our business and have a few key initiatives planned for fiscal 2025. These include continuing to develop our 3D design capabilities and implementing a new point-of-sale system across all of our stores. Additionally, we are investing $14 million in streamlined handling equipment for our distribution facility. These key initiatives over the next 12 months aim to establish a strong foundation to fully enable long term growth for both our in-store and online operations.
This concludes our prepared remarks. We would now like to open the call for questions.
Question-and-Answer Session
Operator
Thank you. We will now begin the question and answer session. [Operator instructions]
Thank you. Our first question is from Jesse Gamble with Donville Kent Asset Management. Please proceed with your questions.
Jesse Gamble
Hi, thanks for taking my question. My main question is on planned store openings versus closings. You kind of spoke about how last year went. I’m just wondering what your outlook is going forward on how this year and next year looks on planned openings and closings. Thank you.
Andrea Limbardi
Hi Jesse, it’s Andrea. Great to hear from you.
While we don’t have numbers to share right now, we do have plans for new store openings this year and also for quite a few store renovations, so shortly we’ll be able to share more details with you, but it is an important part of our capital allocation for this year.
Operator
Thank you. Once again, if you would like to ask a question at this time, you may press star, one from your telephone keypad. A confirmation tone will indicate your line is in the question queue. We’ll pause a moment while callers enter the queue. Thank you.
Our next question comes from the line of Edward O’Flynn with Parma Investments. Please proceed with your questions.
Edward O’Flynn
Hi guys, Eddie O’Flynn here from Parma. Firstly, congrats on what I think is a very solid set of results against a very challenging backdrop, by the sound, so well done on that front.
I suppose I was looking for an update on any potential plans for a full listing for the shares and how that’s progressing. I know there’s some shareholders who are very keen to keep updated on the progress on that front.
Richard Wait
Andrea, do you want to touch on that first?
Andrea Limbardi
Hi Eddie, good to hear from you. As a Board, we’re continuing to evaluate the up-listing. We’ll have more to share shortly. We don’t have an update on today’s call.
Edward O’Flynn
Okay, thanks. Also, good news on you purchasing 10% of the non-voting [indiscernible]. We were obviously delighted to hear that news in the update yesterday.
Andrea Limbardi
Good, I’m glad to hear that, and thank you for your comments on our Q1 results. We’re also very pleased.
Edward O’Flynn
Great, well done.
Operator
Our next question is from the line of William Kim with Presidio Asset Management. Please proceed with your questions.
William Kim
Congrats on a solid first quarter, I guess, and thank you for re-engaging investors on a call. I hope you continue to do that going forward.
I guess you mentioned plans on opening new stores. How do you think through unit economics, and what is your expected return on invested capital on new store openings?
Richard Wait
Thanks William, Richard Wait here. Nice to hear from you again.
First of all, yes, we are looking to keep these going, the investor calls. We’re very pleased that we kicked it off with this one, so thanks to everyone for joining.
Looking at store investments and capital, it’s not an easy analysis to figure out, but we look carefully at the profitability and where we’re looking to position. We believe there is locations where we can expand further, so we’re investigating that. We do believe there’s opportunities throughout Canada to increase our footprint. We had retracted quite significantly during CCAA, and there is great opportunity there, but we’re being very selective in where we want to locate and where we want to expand.
I don’t know if that provides a little bit of insight, but I don’t have the--on an ROI level, I won’t get into the details of how we calculate the ROI, but certainly we--you know, rents are very difficult in certain locations, and you can appreciate in the fashion center malls, the triple-A malls, they’re challenging, but we have a very good relationship with our landlords and we continue to, and they helped us during CCAA and we believe we have, as we’ve mentioned in previous releases, better than market rent situations and we did comment on further that we are seeing rents go back, as everyone else in the retail industry, go back to somewhat more--new normalized rent conditions. But yes, we’re very optimistic on our renewals, on our new stores that we’re planning in the future that there’s still further opportunity to improve.
Hope that helps you.
William Kim
Great. If I could--yes, thank you very much. If I could follow up with a couple more, I guess generally speaking, what does a new store cost to open, and what is a timeframe to breakeven and what is kind of the expected range of four-wall operating earnings at maturity? Two, with the substantial amount of working capital on the balance sheet, obviously very happy to see the NCIB, but is there any plans to be a little more aggressive on that side?
Andrea Limbardi
These are great questions, William - hi, it’s Andrea. While we don’t share the exact numbers externally, what I will share is, as Richard said, is that we ensure each property in and of itself is profitable, and then the cost to build depends on a lot of things - it depends on the condition of the location we’re taking, whether it’s a net new build, what kind of partnership we may have with the landlord, so it’s complex. What is important to us is that we have a relatively short term payback and yet that we build stores that provide our customers with the optimal experience.
As we work on some of our final strategic plans, we’ll share more around how we’re looking at capital allocation and what’s going towards growth, what’s going towards maintenance, and we’ll be pleased to share those numbers in short order when we have a bit more information solidified.
Richard Wait
If I can add one thing to that, relative to the NCIB, I know you touched on, as you saw in our press release last night, what we will be putting in place subject to TSX approval, an NCIB up to 10% of the public float. Now, that’s one of the uses of our capital, and you can appreciate, yes, we do have a healthy cash position, and I think I’ve mentioned this before to investors that you have to recognize that there are peaks and valleys in the cash situation, so you’re seeing it at four points during the year but we do have high points and lower points, so we’re careful to manage our cash position. We do have a healthy cash position, but we are looking to consider--subject to the TSX approval, consider buying back some shares.
Beyond that, we had mentioned also we’re using--well, $14 million of our capital is going into our distribution center facility to bring that up to the latest technology. There are other capital investments - we talked a bit, Andrea touched on expanding the store footprint, so we’re going to be doing that, that takes capital too. We’re being very judicious in how we use the capital, but we recognize that in the past, the Company has had very large cash balances. We are putting it to work for us, so I believe we’re doing the right thing there.
Okay?
William Kim
Great, thank you.
Richard Wait
Thanks William.
Operator
Thank you. This concludes the question and answer session. I would like to turn the conference back over to Andrea Limbardi for any closing remarks.
Andrea Limbardi
I just want to thank you all for joining today. We appreciate your questions