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Actually, their main brand, Urban Outfitters, is no longer their top seller (and is losing sales), but Anthopologie is, 43% of 2023's sales, and boasts 12% same-store sales growth. Nuuly, their new subscription sales business, accounts for 5%, but he doesn't mind it isn't making money yet because it's growing fast. Overall company adjusted net sales rose 7% YOY. Also, inventories are tight, so they don't need to markdown goods. Over the winter, the company gave mixed signals for February sales and this weakened the stock. Shares fell until May 21, when they delivered a terrific quarter with an earnings beat and boasted stronger growth.
We think the current valuation looks reasonable to us. SPB’s EV/EBITDA is around 8.0x, at the lower end of historical averages. SPB’s debt level is 3.9x, quite high but on par with industry averages and gradually declining. We don’t think the dividend would be at risk for now (although things could change in the future). According to the Annual Information Circular, Brookfield owns 260,000 Preferred shares, each preferred is exchangeable to 115.4 common shares, Brookfield also owns 6,696,500 common shares. Assuming the exchange, Brookfield would own 13.2% of SPB, there is a possibility for a privatization deal, but the probability is uncertain. The business is tough to consistently create shareholder value given the cyclicality, capital intensity and high leverage level. That being said, despite tough execution, the business would have tremendous runway in terms of staying power. Brookfield likes 'recurring' revenue and that is certainly an attractive here. We think $8.50 would be an attractive entry point, but with its small size and leverage investors should consider it a higher-risk stock overall.
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Splitting the company into two to separate the PNG business makes sense to us. The return of capital could be as much as 76c per share. This all sounds attractive...BUT....it is already a very small company. With less capital, and a split, shareholders will be left with two tiny market cap companies, and it is very possible that they will struggle to get investor attention. Valuations are cheap, but owning two sub ~$30M market cap companies may prove to be very frustrating, unless small caps stage a big rally. Adding in cyclical risks, and we think the 36% YTD gain already reflects some of the possible potential. Thus, we are less enthusiastic at this time on this split.
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The broader energy drink market is seeing a slowdown and while Celsius is still growing the top and bottom lines in the 30% range, investors are worried about the slowdown in growth more broadly. A higher valuation also adds to volatility. Pepsi was also going through some inventory adjustments over the last few months that led to a bit of a speedbump for the company. The space in general is out of favour currently but we don't think the longer-term outlook and potential has changed a whole lot here.
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Performance of S&P 500 vs. TSX:
The impressive performance of the US market
Here is the performance in terms of compounded annual growth rate (CAGR) of the S&P 500 within different time horizons with dividends reinvested:
3-year: 10.2%
5-year: 14.9%
10-year: 12.8%
On the other hand, here is the performance of the TSX index in the same time frame:
3-year: 5.7%
5-year: 9.0%
10-year: 7.1%
The outperformance of the S&P 500 relative to the TSX on three, five and ten-year horizons is quite significant. The S&P 500 performance was predominantly driven by a few large technology companies. These companies have performed so well in the last decade and will likely continue in the near term.
This question of whether investors should ignore the Canadian market becomes a totally legitimate question.
We think investors can think about portfolio allocation in terms of defensive and offensive sectors. The US market which is heavily dominated by large technology names tends to do much better in a bull market.
On the other hand, the Canadian market is heavily dominated by well-established companies in traditional industries like financials and energy. These sectors tend to not perform as well in a rising market but would be resilient during a market downturn due to their durable cash flow and predictable dividends. Similar to the cash allocation of the portfolio, which tends to be a drag on performance during a bull market. The defensive portion of the portfolio sometimes feels unnecessary until the next bear market.
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The consumer is realizing that dollar stars no longer offer bargains. These stores were raising prices aggressively during Covid and can't call themselves dollar stores now. Look at places like Walmart instead for deals.