TD November Report $12 Target Price
Roots TD
November 6, 2018
(ROOT-T) C$5.01
Q3/F18 Preview: Not Everyone Appreciates a Warm Fall Event
We are lowering our target price to $12.00 from $15.00, anticipating weak Q3/F18 results in early December.
Impact: NEGATIVE
We are disappointed in the magnitude of our financial revisions this morning, and the share price performance since its last financial report. As communicated by management in the Q2/F18 release, we anticipated headwinds, including the prior year "Canada 150/Be Nice" campaign, to affect the Q3/F18 results negatively. However, we did not anticipate record warm temperatures throughout the month of September in the key market of Ontario to ravage the key "back to school" selling season. With a limited track record as a public company and a small float, we comprehend the punitive reaction to the share price in the anticipation of a weak quarter. Nonetheless, we believe that the structural integrity of the Roots story remains in place and the share price decline is materially overdone.
We believe there are many forthcoming growth drivers. Contributions from new product lines, an enlarged eCommerce catchment area, the undertaking of store renovations, and a modest expansion of the store footprint should start to benefit the company in Q4/F18 and accelerate in F2019. Admittedly, in light of the greater- than-anticipated reset to our F2018 forecast, we have taken a more cautious approach to our F2019 growth outlook. We note that our forecast still entails an attractive three-year EPS CAGR in excess of 15%.
Lastly, on valuation, we believe that there is a lack of respect for the consistent performance of the royalty stream from international operations. One could argue that this segment alone is worth ~$4.00 per share, in our view. This, along with our growth outlook (albeit currently paused) for the North American operations, supports our view that at the current share price level we will maintain Roots on our ACTION LIST.
TD Investment Conclusion
We maintain our ACTION LIST BUY recommendation, while lowering our target to $12.00 from $15.00. Despite the current financial setback due to weather and an operational marketing misstep, we believe that there is tremendous value at the current share price.