Their Shoppers Can't Desert Them

11/03/2009 12:01 am EST


Ryan Irvine


The North West Company's far-flung stores profitably serve a captive clientele, writes Ryan Irvine in Keystone's Income Stock Report.

The North West Company (TSX: NWF-UN) is a leading retailer to undeserved rural communities and urban neighborhoods throughout Canada, Alaska, the South Pacific, and the Caribbean. The company operates 225 'small box' retail stores under the trading names Northern, NorthMart, Giant Tiger, AC Value Center, and Cost-U-Less. A typical store is 7,500 square feet in size and offers food, family apparel, housewares, appliances, outdoor products, and services such as quick-service prepared food, special ordering, money transfers, and cheque cashing. The company’s strategic advantage is its ability to serve small and isolated communities ranging in size from 500 to 7,500 people. Many of the company’s stores in Northern Canada and Alaska have been continuously serving their communities for over 340 years.

Looking back over the past 12 years, North West Company has demonstrated a very consistent trend of earnings and revenue growth. During this period, revenues have increased at an annual rate of 7.3% while earnings and operating cash flow per share have shown annual increases of 12.2% and 10.4%, respectively. The resilience of North West Company’s business model stems from the non-discretionary nature of its product offering—namely food. North West Company banners are the dominant, and in some cases only, market players in the small communities that it serves.

Moving forward, the primary drivers behind growth will be additions of retail stores as well as same-store sales growth. We have already seen a very promising expansion into both the South Pacific and the Cayman Islands. We expect the company to continue to open up new locations in new markets and to continue to enhance their product offering in existing locations. Because the communities that North West Company serves are small in size, we believe that they are relatively isolated from larger competitors such as WalMart (NYSE: WMT). The company can very feasibly meet or exceed a growth rate of 5% to 8% over the next ten years.

As consistent as the company’s earnings and revenue growth is its growth rate in distributions. Currently the company pays a quarterly distribution of C$0.34 per share, which equates to an annual yield of 8.09%. The distribution was just recently increased. Over the past ten years, North West Company has increased their distribution on 11 separate occasions, at an average rate of 12.4% per year. During this period, the average payout ratio has been maintained at approximately 80% of earnings per share and 95% of free cash flow per share. The company’s payout policy has been aggressive enough to supply a strong and growing dividend to unit holders, but conservative enough to maintain and reinvest in operations. We believe that management will continue to increase the dividend on an annual basis, at a rate that reflects the company’s long-term growth in earnings.
Based on our relative and absolute valuation models, we have arrived at a fair value for North West Company of C$23.75 per share. [Shares traded near C$17 Monday—Editor.]

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