Special Situations

Reitmans – Emerging from CCAA protection

Image: Reitmans clothing store

During periods of high inflation, rising interest rates and potentially low market returns, stock pickers need to dig much deeper for investment opportunities. One area we can still find good investments are in special situations, and earlier this year, we initiated our first special situation stock investment since our 2020 investment in Codemasters, a British video gaming publisher that Electronic Arts acquired. In the briefing below, we briefly summarise our next special situation case, Reitmans (Canada) Limited.  

In early Q4 2022, we performed a global screen and study of consumer specialty retailers. There were 497 companies (>$50 million market capitalisation), and we shortlisted 60 companies. So far, we have invested in one, Reitmans, while another company, a Brazilian fitness and apparel retailer, is on our primary 100-company shortlist.  

Market capitalisation: $142 million (CAD)
LTM Revenue: $778 million (CAD)
LTM EBIT: $40 million (CAD)
EV/EBIT: 3.9x
Cash: $64 million (CAD)
Interest-bearing debt: $0
Value of its real estate: $110 million*

Reitmans was in a unique position during the pandemic. From our experience, it’s been the first retailer we have watched to seek bankruptcy protection prior to maintaining an interest-bearing debt-free balance sheet position. Before the pandemic, Reitmans predominately focused on physical retail across its five brands (two sub-brands, Thyme Maternity and Addition Elle, have now been closed) and had to shut down its operations during the pandemic. They laid off 90% of their retail store staff and let go of 30% of its head office. Ernst & Young was later appointed to lead its restructuring plan and in December 2021, the group obtained approval for its plan from creditors and returned to public markets the following month. 

Emerging from Companies’ Creditors Arrangement Act (CCAA)

Ernst & Young successfully restructured the group during the CCAA and a key focus was improving its balance sheet and negotiating new terms with its creditors. You can find key restructuring documents here. We hardly invest in these situations, but when we do, it’s essential that we see a deep discount to its intrinsic valuation.

Before we get to Reitmans’ operational progress, it’s critical to review its assets and valuations, which are central to our investment case. Reitmans owns two real estate assets in Montréal, Canada and a distribution centre which we estimate to be worth around $110 million in total. Another key area of its balance sheet is the reduction in lease payments which has fallen from $69 million in FY 2020 to $38 million over the past year or 4.3% of its revenue. This significantly strengthens its cash generation and if we include these adjustments to its book value, we value its net assets to around $380 million, a 167% upside from current market capitalisation. 

It’s important to note that the fashion apparel retail market has become highly challenging with the rise of e-commerce and fast fashion peers like Shein. Reitmans has struggled to grow revenues since its peak of $1.05 billion (CAD) in 2010. Since then, its closed chains, like Cassis, scaled back the store count in the US and struggled to win the younger generation fashion categories. 

While we do not see Reitmans becoming a growth business, there’s room for operational efficiency gains, and Reitmans has recently begun making them. Beyond the closure of its two less-performing brands, Addition Elle and Thyme Maternity, the group has also closed some unprofitable stores. Reitmans stores average 4,700 sq. ft., while Penningtons, its leader in the Canadian plus-size fashion market for sizes 12-32, average 6,000 sq. ft. Both brands reduced their total store count by 12% since the start of the pandemic. From a product lens, Reitmans has also cut its number of promotional discounting and markdowns, increasing the group’s gross margins to their highest levels since 2016. E-commerce now represents 26% of total sales and continues to achieve double-digit quarterly growth. 

From an earnings view, we expect its 2023 FY to be much better than previous years, with operating profits of $48-$52 million CAD. 5x EV/EBIT doesn’t seem too expensive for the retailer, given its slightly better profitability potential. Like most special situation investment cases, we are quite strict on our target price and hence, don’t view these as long term investments. 

Jenga Investment Partners Ltd (“Jenga IP”) is authorised and regulated by the Financial Conduct Authority FRN: 973457 and registered as a limited company in England – Company No 13715082. The Briefings is prepared by, is the property of Jenga IP. and is circulated for informational and educational purposes only. Additionally, Jenga’s actual investment positions often will, vary from its conclusions discussed herein based on a number of factors, such as portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. 

This report is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. Jenga IP research utilizes data and information from public and private sources. Sources include, the Australian Bureau of Statistics, Bloomberg Finance L.P., Consensus Economics Inc., Dealogic LLC, Eurasia Group Ltd., Factset Research Systems, Inc., The Financial Times Limited, Global Financial Data, Inc., Haver Analytics, Inc., The Investment Funds Institute of Canada, Intercontinental Exchange (ICE), International Energy Agency, Markit Economics, Moody’s Analytics, Inc., MSCI, Inc., National Bureau of Economic Research, Organisation for Economic Cooperation and Development, Refinitiv, S&P Global Market Intelligence Inc., Tokyo Stock Exchange, United Nations, US Department of Commerce, and World Economic Forum. While we consider information from external sources to be reliable, we do not assume responsibility for its accuracy.

The views expressed herein are solely those of Jenga as of the date of this report and are subject to change without notice.

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