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  Will Reitmans turn?

BENJ GALLANDER and BEN STADELMANN

Friday, April 4, 2014

It has been a hard, cold winter. One friend has a theory that being cooped up for so long has resulted in a collective psychological repression. According to him, once the heat hits, the pendulum will wildly swing in the other direction, releasing a bacchanalian frenzy.

Many would scoff at this provocative notion, but one women's apparel retailer that would love their customers to throw caution to the wind is Reitmans.

A perennial favourite of value investors and a lustrous Dividend Aristocrat with an enviable track record of raising payouts, Reitmans has taken up residence in the bargain bin.

After decades of gradually expanding its footprint across Canada, its revenues crossed the billion dollar threshold in 2007. More recently, sales turned down, margins thinned and profits fizzled. Last December, management finally bent to grim reality and chopped the annual dividend of 80 cents to 20.

There are a variety of reasons for the slump. The company spent too much on share buybacks and did not invest aggressively enough into building its online presence. A warehouse management system implemented in 2012 caused disruptions to shipments of merchandise.

Long trusted as a mid-range vendor of clothes suitable for work, some divisions have drifted from the sweet spot of "reasonably priced" in the direction of cheap and tacky. Competition has increased, with new foreign entrants setting up on Reitmans' domestic turf.

The annual report illustrates the dimension of the difficulties. The top line drooped from $1.0 billion to $960 million, while profits shrank from $26.4 million to $10.8 million.

The seasonally weak fourth quarter produced a net loss of $2.6 million, compared to $1.1 million in the previous year. Same-store sales, a vital metric, were off by 2.8 percent.

The company's Thyme Maternity boutiques in Babies "R" Us stores in the U.S. have performed dismally. All 169 locations will be closed, joining a long list of Canadian retailers that have failed with forays south of the border. The associated expenses will crimp the bottom line in the current quarter.

The other ailing division is Smart Set, which caters to a younger, fashion-conscious consumer. So far, efforts to retool the brand have not gained traction, while innovative alternatives such as Zara and H&M are maintaining their lead.

A more generic problem is that many conventional storefront retailers are struggling with inefficiencies as their online revenues grow. They are finding that their e-commerce businesses are cannibalizing sales from bricks-and-mortar outlets.

Not that they have much choice in the matter; if an enterprise doesn't take the Internet seriously, it will simply lose out to better-placed competitors. But a situation like this does lead to difficult decisions about store closures, a challenge that Indigo and Staples are also very familiar with.

Though the dividend cut angered many shareholders, from our corner it was prudent — overdue, in fact. The balance sheet is in excellent shape, with total cash of $122.4 million, up sharply from $97.6 million a year earlier. The debt is nominal at $7 million. Book value sits at $6.56 per share. Solid financing is critical to replenish inventory and keep the stores well stocked with goods to sell.

We believe CEO Jeremy Reitman knows his business and will move to align SG&A expenses with the torpid top line. The fact that the heavy lifting on the technology upgrades has been completed should help.

The Penningtons and Addition Elle divisions specialize in clothes for larger women, and, given current demographic trends, this should position the company well for this growing market. As for Smart Set, it's time to take a more creative and nimble approach; successful competitors haven't been afraid to think outside the traditional fashion paradigm.

We haven't owned a clothing retailer for a long time — not since Jerry Zucker took Hudson's Bay off our hands in 2006. We ended up doing quite well on that deal, though that was another stalwart humbled by a changing retail landscape.

Too bad Reitmans doesn't have the advantage of a plump real estate portfolio (they lease their stores), so success will require sharp pencils, hard work and better execution. The stock was added to the Vice President's Portfolio in February at $5.51 with a sell target range of $16 to $18.


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