Inflation Stays Below 3% and Aritzia Rebounds

[00:00:00] Welcome back to the Canadian Investor Podcast. I'm here with Dan Kent. We are back for a Thursday news and earnings, and I'm actually pretty happy because now we're starting to

[00:00:25] get a whole lot of news, so it makes things a lot easier to do. Very interesting as well with the data that's been coming out. We'll get started with CPI, so hot off the press or this morning.

[00:00:36] Any thoughts before we get started, Dan, on what's been happening in the markets? I mean my portfolio is doing quite well in July. What a crazy month. In terms of earnings, I mean there's not, there's still not a lot of companies reporting, but like there's a few

[00:00:52] outliers that are pretty interesting companies. Another acquisition of a small cap Canadian stock this week that we'll talk about, so should be a pretty good episode. Yeah I think it'll be fun and obviously I think your portfolio, that's because there's more of the small caps variety right? If

[00:01:07] I get that correctly? Yeah yeah I have a lot of Canadian small cap stocks that have just launched this year. I won't name names but I do own probably four or five of them that are

[00:01:19] just cruising right now, probably because of the CPI report maybe and just the potential rate declines further. A lot of the stuff too like I do own not a ton of REITs and utilities but those are doing

[00:01:32] very well this month as well. So it'll be interesting to see if we continue to see that rotation maybe outside of high growth into more defensive real economy stocks that we call them?

[00:01:44] Yeah I think so and I mean I'm just pulling up here for a joint TCI subscriber and I'll explain it for people who are just listening. So essentially over the last month the total returns when you compare

[00:01:56] the SPYs, so the well-known ETHA have that tracks the S&P 500 compared to the small cap, so it's IWM it's a Russell 2000, so small cap that attracts. So essentially the returns have really it's been pretty much since a week so but over the last months the return for

[00:02:15] the SPY is 3% and over the last month the returns for small caps is 8.3% with most of this coming from the last week. So like you said it could be a start of a rotation because small caps have

[00:02:28] really underperformed this year they're up about 9% compared to 19% for the SPY and it's been underperforming for quite some time so it'll be interesting whether it continues going forward. Yeah I think I'd have to go back and listen to the bold prediction episode but I think

[00:02:46] I predicted that the Russell 2k would double the S&P 500, so I mean there's a lot of ways to go but we're only in July so it'll be interesting to see if that could come true.

[00:02:56] We need we would need a gigantic shift but it's been a good start. Exactly now let's get to the big macro before we kind of get sidetracked here because that wasn't on the dog but that's okay I'm sure people were interested in hearing that perspective for small

[00:03:12] caps or as the the index. Now Canadian CPI came out just today, headline CPI was 2.7% year over year while it declines 0.1% versus May. I didn't see do you know what the expectations were around there? Level like they hit targets. They hit expectations okay pretty much

[00:03:34] all fronts yeah we're just dead in line so the headline number was down from 2.9% in May so that's interesting for people following that and we did mention when we recorded that yes CPI was up

[00:03:46] for May but it was one print so we'd have to wait and see and as a reminder it was 2.7% in April so we're kind of within it seems like that range now for the last few months between 2.7-2.9.

[00:04:01] I don't know if it's a start of a trend but it'll be interesting to see how July is and then August. Food specifically was up 2.8% year over year and up 0.5% versus May so pretty big jump versus May. I didn't have time to check what happened last year on

[00:04:17] a month over month basis because sometimes food will be a bit kind of seasonal when it comes to price increases. Shelter remained elevated at 6.2% year over year and up 0.3% versus May. Services remain sticky and that's something I've been you know hammering on for quite some time

[00:04:37] so that was up 4.8% year over year and 0.2% versus May. Clearly the rate of change declined versus May but is staying sticky on the year over year basis. Energy as a whole was up 0.5%

[00:04:52] year over year but down 2.1% versus May. Gasoline was similar that up 0.4% year over year and down 3.1% versus May and that's interesting because that is something I think you know that I've been

[00:05:05] hammering on that quite a bit where a lot of the I think a lot of the CPI data and the downtrend we've kind of been seeing is while energy prices have been kind of putting downward

[00:05:20] pressure on inflation itself so I think that's a big risk that is not being talked enough on mainstream media even on like Twitter I find it's not something that people a whole lot highlight

[00:05:32] but I think that's a big risk that people tend to not notice especially because there's so much focus on the headline number and that would have a big impact. Yeah I mean it definitely impacts pretty much absolutely everything like why I mean outside

[00:05:47] of I guess maybe shelter like other than that I mean food gasoline would impact food prices it would it would impact I mean absolutely everything so it's definitely an important important metric to keep track of I mean gas here in Alberta at least gas has remained

[00:06:04] relatively steady for the better part of the year I think we're like a buck 55 a liter now but I think that's one of the cheaper ones how much you I don't know we don't use our car all that

[00:06:14] much so we fill in maybe once a month and one of our main car once a month and then our second car probably once every two and a half three months which I'm due to fill and we have to put premium

[00:06:27] because they both have turbos in it so it's always a bit more expensive but yeah I think it's probably I don't know like probably in this similar range I would say I'm just kind of going

[00:06:39] on memory based on the last time I filled that yeah I mean I know inflation here in Alberta is still I think we're like one of the highest in the country right now but that's mostly just because

[00:06:49] of the shelter and yeah and just gasoline prices overall too it's uh but good signs from yeah a lot of inter like you said yeah interprovincial migration is exactly huge right now that's it and now to continue on some more categories here the three the two I'll mention

[00:07:07] here actually three so clothing was down 3.1 percent you over a year and down 1.9 percent in May versus May durable goods and semi-durable goods were both down slightly down you over year and month over month and what this tells me and we've talked about this quite a bit is

[00:07:25] people are cutting back on things that are non-essential and clothing is non-essential semi-durable and durable goods typically will not be essential as well so there are things you can push back people may say well what if your clothing you know you know is really old usually you

[00:07:40] know if you're really trying to make ends meet that is something that you'll figure it out and you'll wear clothes that may be slightly outdated or you know you might even have

[00:07:52] a hold or two in your socks or something right it's something that exactly what I was going to say yeah so I think that's people something people will push back in terms of of purchases and it

[00:08:03] really aligns what we've been seeing with retailers retailers have been saying that now for a better part of the of a year that Canadians are shifting their purchases and even in the US we're starting to see it they're shifting their purchases from non-essential to really focusing on

[00:08:18] essentials and those retailers that have that rely too much on those non-essential are starting to fill the pinch and Canadian Tire has been kind of the poster child for this in Canada yeah like Canadian Tire Costco although Costco you know they're still doing quite well because they

[00:08:37] have a lot of food items and stuff like that but pretty much even something like Dalarama is stating you know even though they're like cruising in terms of overall results just because you know more Canadians are heading to discount stores like they're still mentioning

[00:08:53] a slowdown in those discretionary items because it's just it's not on the priority list right now for a lot of people yeah exactly and just around this out here so something we always talk about is

[00:09:05] the measures of core and core CPI because the Bank of Canada tends to focus a little bit more on that so two out of the three measures of core CPI's were down CPI common was down from 2.4% to 2.3%

[00:09:20] that's all compared with me this uses CPI for commonly purchased goods and services CPI median was down 2.7 was down to 2.6% from 2.7% this uses the median price increases so the 50th percentile

[00:09:37] the CPI basket and then the last one CPI trim was flat at 2.9% so this is probably the CPI trim the one that people when you say like core when you talk about core CPI in the US for example

[00:09:50] this is probably the one that's the most similar because essentially removes the most volatile components on both ends so the ones that decline the most and the ones that decrease the most I

[00:10:00] will remove that and then you get this CPI trim that one stayed flat so I would say overall I think it was probably a good CPI print versus what the Bank of Canada could have expected you

[00:10:14] know overall prices are declining the headline number two out of the three measures for core CPI so if I had to wager I mean I don't know like who knows what they'll do at their next meeting but

[00:10:27] there's probably a good chance of a cut if I had to wager at this point because now we're seeing that you know the inflation date at least for CPI is looking a bit better at least this

[00:10:37] month compared to last month or maybe they'll maybe you know the other side is they'll wait a little bit and try to get a few more months of data before they actually start cutting well I know

[00:10:48] they were saying that the markets were pricing in it bumped up from some like 78% to 90% that they would cut next meeting so I mean 90% is pretty high that's probably the highest it's ever been

[00:11:02] leading in to the meeting I mean the one thing about this trim is I'd be interested to see what they actually trim out because right now like in terms of overall volatility I would say that

[00:11:12] you know clothing and shelter are probably like the two ones that are like widest on the spectrum and the most volatile so I wonder if it would trim out something like that do they actually

[00:11:21] say what they remove or I think they must do somewhere but I don't think they would on the big release unfortunately yeah but that's a good question so it's it'll be it would be interesting

[00:11:32] I'd be curious to see what they would remove it's probably like it's probably a couple key components I mean energy is crazy volatile so if that's removed it's not exactly the best

[00:11:42] indicator but yeah it was a good it was a pretty good print like you said the last one you know it was it looked pretty scary there last month but as you said it's just one print yeah and I misspoked

[00:11:52] what I meant is continue cutting not start cutting because we all remember that cut in June so now we'll shift over here I think we've talked enough about the scpi numbers so do you want to

[00:12:05] talk to us about that small cap company that got acquired by a private equity firm yeah so how do you pronounce this? yeah yeah so another small cap stock got scooped up at a pretty big premium by a private equity

[00:12:25] firm last week so they do have smaller business segments in terms of you know hydraulics for planes and actuators and stuff but for the most part this company just constructs landing gear for airplanes so the deal was for $1.35 billion which represented a 28 premium over the trading

[00:12:43] price of the shares at the time of purchase and even if we look to the company over the last while like its share price had gone up by quite a bit just because of you know a bit of a recovery in

[00:12:53] terms of small caps so it's a 28 premium over you know a stock price I was doing quite well the deal includes a $40 million cancellation fee which would have to be paid by Herude DevTech in the

[00:13:06] case they don't want the acquisition to go through like something falls apart on their end and you know this would include if another company were to come in and bump the offer up and you know

[00:13:19] maybe they'll pay more for the company and that in that side of things they'd have to pay $40 million to the private equity firm in the case on the other hand if the private equity

[00:13:28] firm backs out the company will be given $63 million so I mean shareholders who purchased in 2022 lows must be pretty happy this is pretty much the stock has tripled since then so there's no doubt you know

[00:13:41] a lot of small cap companies they're cheap right now they were cheap back then in 2022 and we spoke probably a month ago now about another small cap Canadian Stock Park Long Corporation company that I

[00:13:52] thought was heavily undervalued for quite a while got bought by another private equity firm as well the premium in Park Lawn was quite a bit more I think it was 62 or 64 percent but shareholders of

[00:14:05] Herude DevTech had got to be pretty happy with a 28% boost to their shares so the deal is for $32.50 a share and as of right now the shares are trading around $31 so I mean there's a bit

[00:14:17] of arbitrage there but not really enough in my opinion ever make it worth it to you know kind of buy to take advantage of that gap the deal is expected to close in March of 2025 if it didn't

[00:14:28] close sorry if it did close somebody who bought would earn you know a difference of about 5% but you'd have to hang on to your shares for what is that nine months now to earn that 5%

[00:14:39] but if the or if the gap closes obviously it could close before the acquisition closed but if the deal fell through I think you'd no question see the stock price fall you know

[00:14:49] probably back to the levels it was trading at pre acquisition so there's a there's some pretty high risk there I know a lot of investors kind of look for these you know arbitrage opportunities that

[00:14:58] exist when these acquisitions happen I mean one of the most notable was probably Activision when they got bought by Microsoft like that was actually one that I ended up buying and holding

[00:15:08] even buffing played the arbitrage on that one yeah yeah so I bought that and held and it actually ended up working quite well because you had to hold through the 2022 you know nastiness of

[00:15:20] the S&P 500 so I think I ended up making that was a big arbitrage I think it was 24% or something just because regulators didn't really know yeah there was a lot of regulators not just in the

[00:15:35] US I think in Europe too that were questioning the deals so yeah you had to put on your sealed seat belt and hang on tight if you wanted it to be able to hold on and actually like

[00:15:48] you know turn pan out which it did so that's a pretty good play oh yeah every I remember they would come out every single piece of news on Activision would either send the stock up

[00:15:59] like 10 15% you know closer that acquisition price and then they would come out with another article about how it was you know there's a good chance it's going to get declined and

[00:16:07] then it would just plummet again so I mean for something like that I just bought it I didn't look at it for I don't know how long it had to be 12 or 15 months but it ended up working out quite

[00:16:17] well but as soon as they get really tight to the acquisition price like this I mean a lot of people you know they look to something like this but I mean to hold it for you know 4.8% for

[00:16:28] nine months until it closes or you know run the risk of something bad happening here I mean in my opinion it's not really worth grabbing that that 5% yeah I think it arbitrage tends to make more sense when there's a bigger gap and you might actually also like the

[00:16:44] company so if it doesn't pan out then you're fine withholding the shares so I think those are the cases where I would look at you know doing our arbitrage play a bit more let's say there's a

[00:16:55] 15 20% gap because there's a lot of uncertainty with the deal but you still like the assets in the company then to me it can make a whole lot of sense to to play that arbitrage because of that

[00:17:07] because it's almost a win-win situation what yeah that was the one big thing with Activision like even if it didn't go through I didn't really mind owning Activision I mean I probably I probably

[00:17:19] would have been in the red a bit because I think if it actually did fall through the share price would have probably dropped a bit but not to the extent is something like this where

[00:17:28] I mean even in the even in the case of Park Lawn I mean it wasn't trading at its share price but I mean you want to take advantage of a small arbitrage opportunity on a 60 premium to an

[00:17:38] acquisition price I mean that's it's uh it's high risk in that case not really yeah not really worth it in my opinion but yeah I mean this is the second small cap Canadian stock that's been

[00:17:50] scooped up by a private equity firm I believe Park Lawn was by a US PE firm I don't know I didn't get time to look into who actually bought this company but yeah I don't know maybe I bet you

[00:18:04] it's not the last move on before I start ranting on my true feelings about private equities so we'll move on here to MTY food groups so we've talked about them I think the last earnings

[00:18:18] that they had so revenue was down 0.5% to 304 million system sales so that's important because it is mostly a franchise business model that they operate with all their different brands so system sales were down a bit less than 1% to 1.46 billion in their earnings really as they

[00:18:38] said that sales were relatively stable not a fan of using that kind of language personally I like it when they say how it is not kind of using these vague words because it's not great to be

[00:18:50] honest to have stable or flat sales and in this case slightly down when you're seeing an inflationary environment so that is to me like pretty concerning right there because your sales are not going up

[00:19:04] and obviously the cost of everything is going up so clearly there is a bit of an issue with the business here I at least there are some kind of orange flags I would say the good news though

[00:19:15] is that system sales were up in the US but that was barely up at below 1% Canadian sales saw a decline of 3% same store sales were down 2.1% versus last year so on the call management said that

[00:19:29] maintaining traffic has been difficult over the last 12 months and it's going to be key to maintaining sales I mean it's I agree that that will be key and I think people who are

[00:19:43] interested in this name will have to figure out how they plan to do that because clearly they're facing some big headwinds and it's not to be fair it's not just them it's just people don't have as

[00:19:53] much money to to spend that's I think just the reality and earnings per share and net income were down by 10% for the quarter free castle was down 18% to 33.3 million for the quarter

[00:20:08] on the bright note on the bright side they bought back 12.8 million worth of shares during the quarter and they also reduced their debt by 16.3 million for the quarter and 77.9 million over the last

[00:20:22] 12 months so that is definitely some good news and if you look at their interest expense as well you clearly can see that they are benefiting from lower you know lower debt because most

[00:20:34] companies that's not the case right now they're seeing their interest expense go up for the most part at least they stable if they have fixed term debt and that is something that we've highlighted

[00:20:44] recently and I think it's really important when you look at businesses especially in this type of environment if a business has a lot of debt or you're seeing the interest expense kind of go

[00:20:54] one way or the other but especially if you're seeing it go up you definitely want to understand how the debt is structured even if they don't have variable or revolving facilities

[00:21:04] just a synonym even if they don't have variable debt I mean they could still have term debt is coming up that they will have to refinance at a significantly higher rate so these are all things

[00:21:15] to consider but MTY food group definitely concerning on the sales front there are some positives like I just mentioned and for people who are looking or interested in this name you definitely want to understand how they plan on kind of turning things around for sales and you want

[00:21:32] to understand like I said how debt will be going forward because they've made some some strides in that department but debt is still relatively high for that company yeah so if you can see in august like it was low and then and then it spiked up the

[00:21:47] interest expenses like I was kind of looking there's usually two situations that this could be they either have a ton of floating rate debt and they just got hammered by rising rates but they actually made an acquisition of barbecue holdings which is like a US based

[00:22:03] company so that's probably where the debt spike came from and then in turn you know it could be floating rate debt as well rising interest rates obviously impact that I mean MTY is kind of like

[00:22:13] a double headwind because first off slower consumer less you know fast food sales stuff like that but I think they have a ton of like mall exposure you know there are a lot of their

[00:22:27] stores are in you know food courts and things like that and I mean obviously with spending down you're probably going to have activity at malls down stuff like that so that's going to

[00:22:35] impact it as well I believe they have like so much shopping mall exposure that they actually like segment I didn't get a chance to look at the quarter but they actually like segment out to

[00:22:45] like kind of talk about how that portion of the business is operating but yeah it's uh it's not really a good environment especially like you know if sales are flat especially with

[00:22:54] food inflation I mean the one that's been going up quite a bit I mean you need to be at least keeping pace with that and you're definitely not seeing it in Canada.

[00:23:03] Exactly so I think not much more to add here so do you want to move on to the next company we have on the dock? Yeah so Aritzia. A fan favorite. Yeah I know a lot of listeners own it so definitely

[00:23:17] I think there's going to be a lot of people listening to this call so yeah I uh I own like I own Aritzia we've covered it over at Stocktrades Pre-Membr for for quite a while

[00:23:27] they posted a pretty pretty solid quarter revenue came in relatively in line with estimates but earnings per share came in about 35 percent above expectations overall revenue grew 7.8 percent year over year comparable sales were up by 2 percent this isn't really anywhere near the

[00:23:44] growth rates the company was putting up just a few years ago but the fact that's you know even putting up growth in a pretty tough environment I mean this is like a mid-tier retailer it's

[00:23:53] not exactly where you go to get you know cheap clothing it's not exactly where you go to get ridiculously expensive clothing but it's definitely you know it falls in that uh in that mid-line you

[00:24:03] know area if we segment out Aritzia's business it's it's pretty clear the US end is pretty much driving all of the growth so year over year revenue is up 13 percent and in total US revenue

[00:24:15] makes up more than 57 percent of the company's overall business I believe like even a year or maybe 18 months ago this US revenue you know that's when it started to eclipse the Canadian

[00:24:27] revenue but it wasn't you know the the US portion of the business is definitely growing at a much faster pace in the Canadian end I wouldn't be surprised you know in the next year or two we

[00:24:39] see US revenues you know exceed 70 percent of the company's business I mean the US market is just that much larger they're not as developed I would say in the US so there's you know more

[00:24:52] more room for growth there rather in the the Canadian end where they're more of a established brand and you know we just have what one tenth of the population and at this point a much weaker consumer margins and inventory have been pretty key factor for Aritzia uh followers

[00:25:08] followers of the company may remember that the company made you know a few missteps with its inventories during the pandemic with that left it pretty much with ballooning overall inventories and as a result of that the mark down quite a bit of product which in the

[00:25:21] end hits margins pretty hard inventories now sit at 396 million that is down 18 percent from one year ago today and is down 22 percent from the all-time highs it witnessed in 2022 I think it got up to like 510 million or something in terms of inventory gross margins increased by 510

[00:25:40] basis points 5.1 percent they now sit at 44 percent these are you know more so the margins that are that are typical of the company and they attribute most of the boost due to like I said lower markdowns

[00:25:53] due to inventories being reduced along with you know more strength in initial pricing strategies on you know new product lines or you know turning out higher margins from newer products uh they sit at 119 boutiques which is four more than they reported in the first quarter of fiscal

[00:26:10] 2024 so there's a bit of growth there I maintain most of its guidance expecting high single digit revenue growth in the coming quarters expects to continue to expand margins as it just you know continues to navigate its way through a pretty tough situation and again like when you look

[00:26:26] at that US growth relative to to Canadian growth it's not just the fact that you know Canada's smaller population revenue in Canada only grew by 1.5 percent year over year and the US again growing at double digits they don't segment out like Canadian same store sales growth versus US

[00:26:44] same store sales growth they just have that one you know overall same store sales growth so it's it's a bit harder to see like how the Canadian market is doing on that basis but

[00:26:55] overall it was it was a pretty good quarter from the company they ended up closing the day I think it was 15 percent in the green so yeah well according to the CPI data I would say that the

[00:27:08] Canadian was clothing was down 3.1 percent for Ritz yeah so I'm gonna go with the Canadian CPI yeah I mean I would imagine it's it's not going to be if they had Canadian numbers yeah flat to

[00:27:22] you could even probably see a decline especially when you see you know 13 growth in the states versus one and a half from Canada it's highly likely that you know Canadian same store sales might

[00:27:33] have declined but they don't they don't push that out yeah and one thing I think people that are interested in the Namor own and one thing I would definitely keep an eye on is those operating

[00:27:43] margins yeah because there are still pretty low right now the gross margins are going up but I'm always like I always take gross margins with a grain of salt because it's

[00:27:54] it's just such a small part of the actual you know expenses when you think about it the operating margins include way more and yeah they bought them at 2.6 percent now they're sitting at 7.2

[00:28:07] percent but before that so in 21 2022 they were more in the you know kind of mid I would say teens mid teens low teens so that's something probably you'll want to see with Eritzia is at

[00:28:20] least these margins hitting double digit again on a consistent basis I think it'll be a good indicator that they're all on the right track yeah the recovery in the operating but because ultimately

[00:28:31] the gross margins are just revenue and cogs like cost of good so yeah so the operating margins are going to give you a better picture of you know just overall margins and profitability and that

[00:28:41] those have been like you said relatively flat but I mean it was it's a lot better than it was in 2022 I mean you can see it they were from like 15.2 but like their margins got slashed like uh it like

[00:28:54] massively and I mean as a result you seen the stock took an absolute dive too I think it went down to 20 bucks a share and it's now I think it's close to 50 or high 50 so I mean it's a good

[00:29:07] it's a good turnaround quarter for sure they posted a few a few quarters strong quarters in a row after some you know a fairly ugly 12 to 18 months it's okay I'll go cry in a corner with my Lululemon

[00:29:20] stock so yeah I wonder like is that is that going to be the next one I mean that obviously both of those companies are facing a little bit different situations I mean Eritzia I think for the most

[00:29:31] part it was all that that inventory they ended up spending a bunch of money on a bunch of inventory and in the end had to mark it down a ton because IB 2022 hit and it just it hurt

[00:29:42] yeah and I think that's one of the issues right Lululemon was performing a lot better than Eritzia and then things just kind of flipped around where Eritzia now is performing a lot better than Lululemon

[00:29:53] I think one of the things impacting Lululemon is just how Nike basically I think yeah kind of the let's just say the friendly fire or maybe not friendly fire but essentially the ripple effects

[00:30:06] of Nike having struggled so much I think a lot of investors are kind of projecting that into Lululemon and you know I'm still a believer in it I kind of added during the downturn I'm not I'm not adding

[00:30:20] anymore in Lululemon so I'm just kind of waiting and seeing what will happen but the latest quarter I thought everything looked pretty good obviously in North America growth that kind of slowed but you have China that it's picking up but again there could be some headwinds going forward

[00:30:34] for Lululemon as well whereas Eritzia you know they're more focused in the US market so as long as the US does well Eritzia should do well as a whole because like you mentioned Canada is becoming

[00:30:45] a smaller and smaller part of their revenue yeah I think Lululemon is like partially like you said collateral damage just from Nike and there's also like whenever these retailers go through situations like this especially like clothing lines people tend to freak out about how you

[00:31:02] know they're losing the brand power you know nobody likes the clothing anymore and I mean in a lot of situations well I wouldn't say a lot but in some situations it does happen I mean look at Canada Goose

[00:31:14] yeah they were one of the fastest growing retailers in Canada they were exploding in China and then all of a sudden like the brand just kind of fell out it's not as popular anymore

[00:31:23] there was a lot of I mean they had some issues in terms of you know the animal situation and yeah a lot different type of situation but there's a lot of like retailers are crazy crazy

[00:31:34] volatile like depending on the results as well especially right now what's being hit a lot is luxury so I know Burberry got hit a whole lot I saw that in the news they got I think their stock

[00:31:46] is down close to something like if not probably 50% more than that actually so in the past year Burberry so the famous brand you know based in London in the past year it's down 64%

[00:32:02] which is I mean I don't care much about luxury goods that's just me but I know like it's a well known brand and just to give you an idea and I think Canada Goose we can say it's a luxury

[00:32:13] brand as well so those luxury brands have been hit pretty hard LVMH has been faring better but I think it's probably because they have more of a suite of brands if you'd like

[00:32:24] to have more variety there but that's something to keep an eye on maybe it's kind of the bottom for these luxury brands and now is the time to buy because during the pandemic there was a lot

[00:32:34] of people that were buying luxury items that could not afford it and I think now you know people are making sure that they're filling door basic needs according to the Maslow

[00:32:46] you know pyramid of needs so I think it's we're seeing that shift I don't know how it'll go forward but something to look into if people are into these luxury brands is maybe a good opportunity

[00:32:58] now that sentiment seems to be pretty pretty and yeah pretty low for those yeah and I mean if you if you own a retailer like a clothing retail you should probably expect this type of volatility

[00:33:12] I mean if you look at a long-term chart of even Lulu lemon there is plenty of situations where it was down you know 40 plus percent and then it goes up again and it's they're they're highly cyclical

[00:33:24] I mean I would imagine you know a Ritzie is doing quite well right now but I I plan to hold the company for a while but I it's almost inevitable that you're gonna see another

[00:33:34] big swing in price that's just kind of what happens with these companies yeah long-term stock charts you can just see huge dives run-ups huge dives run-ups so it takes a it takes a long-term approach to hold these companies yeah long-term approach I mean it

[00:33:52] can be dangerous holding fashion right there's a yeah there is a big cemetery of once upon a time companies that were darlings of the the markets of the public markets that are now either bankrupt or restructured but have crush it basically returns for investor

[00:34:12] so it's something just to keep in mind that you have to make sure you really kind of believe in the company and yeah you understand the fashion aspect of it because

[00:34:21] it can be pretty tricky to hold I think we've talked enough about fashion let's move on to the smallest asset manager in the world oh sorry I meant the largest asset manager in the world

[00:34:33] so for those are familiar with that you'll know that I'm talking about black rock revenues increase 8% to 4.6 billion primarily driven by higher markets surprise surprise which resulted in higher AUM so for those who've been living under rock yes the markets have

[00:34:52] been doing well especially over the last uh what since the start of 2023 pretty much at this point we've had a little gully as they would say in the big short yeah yeah a little gully around

[00:35:04] October and then it picked back up but since 2023 it's been pretty good right yeah they what is it the s&p 2022 was nasty but then you start off you start off 2023 and the s&p 500 is up

[00:35:20] 44% since the start of 2023 so just to make sense of it so higher assets under management so AUM means that they essentially rake in higher fees because it's typically based on like a percentage

[00:35:33] of asset under management so clearly you know the higher asset prices are the more that black rock will be earning and then you kind of you factor that in with the inflows that are coming in so

[00:35:45] the total new money coming in then it's clearly pretty good for black rock operated income was up 11% earning per share increased 10% you over year to $10 a share AUM increased 13% to yes $10.6 trillion and since 2012 AUM as almost tripled went from 3.8 trillion to 10.6 trillion

[00:36:12] so it's just it's completely insane how large black rock is and i'm just gonna share this for join tci subscriber and you can really see just the increase of assets under management since 2012

[00:36:26] and you can make a case right that we've been pretty much in a bull market since even before then obviously there's been some correction obviously there was the march 2020 uh covid crash but that

[00:36:40] the markets recovered relatively quickly right it could it just took a couple months and i think we were back to that level so all that to say that a company like black rock will definitely

[00:36:48] massively benefit from that and you just see it with their asset under management here yeah i mean they're like their ETFs haul in a huge amount of AUM like i shares they're just it's hard to

[00:37:02] fathom like how much they can keep growing like i know that's been a lot of kind of the the bare thesis on black rock for quite a while like how can they keep growing but i mean

[00:37:11] their assets just keep like growth double digit growth every single year and they're just one of the most well they got to be are they the largest asset manager they have yeah yeah

[00:37:22] largest asset manager yes fidelity and vanguard are two and three not quite sure in which order but black rock is the largest yeah yeah and i uh like i'm kind of curious as to why they haven't

[00:37:34] done better over the last bit like especially with just the overall market activity i would have expected them to to do a bit better but i think they trade at a pretty hefty premium and

[00:37:45] i believe a lot of their growth is is primarily through acquisitions now i know they've made i was trying to look it up i probably won't be able to to provide any commentary on it like

[00:37:54] right now but they have made a couple big acquisitions throughout the first you know six months of the year as well which should continue to help them grow but uh yeah they're

[00:38:04] crazy they're they're basically in line with the market so whether you look at the five last five years or 10 years there are like almost to that dot like within a couple percentage points of the

[00:38:19] sp y so the s and p 500 so okay yeah so if you're looking at 10 years total return so 232 percent for black rock 239 for the sp y so let's just say over that period it's kind of a wash

[00:38:34] and then over five years same kind of thing so 103 percent for the sp y and 100 percent for black rock so you're you're essentially like right in line with the market which is pretty incredible when

[00:38:47] you think about it yeah it makes sense it makes sense yeah i mean obviously they have other like you know fixed income etf so yeah and you know multi assets etf so they have other things but

[00:38:59] interesting to see that the returns are i mean you can pretty much it's just in line with like market i think it's so close at that point and what's interesting too is a lot of people

[00:39:09] are familiar with i shares right and black rock owns this but they purchase i shares in 2009 and at the time it had 300 million must have been 300 billion i think i i miss put like i put that

[00:39:22] by mistake so i'm just gonna say 300 billion i would say and yeah yeah and assets under management and now it has over 4 trillion so it's been a very impressive purchase for them and then if you look and it's always interesting to look at the the investor presentation for

[00:39:40] black rock because they show all this kind of breakdown how it looks like so clearly when you look at their whole portfolio they breaking down between client type style product type and region i won't go over all of them but client type it's pretty interesting so 30%

[00:39:58] is institutional 27 is retail i think retail probably falls more in the mutual fund category here and then 43% is etfs and etfs can be retail or institutional so just so people are more aware of that but institutional would be stuff like for example if you have a defined contribution

[00:40:17] pension plan and you have black rock offerings there that would be institutional and then in terms of so that would be the base fee where they actually get them in terms of the breakdown and for the assets under management it's 54% institutional 9% retail and 37% etfs so clearly they're getting

[00:40:38] most of their fees from retail and etfs and a bit less on the institutional side which is not surprising because when you start offering institutional funds typically there's quite a bit of competition and because they are larger clients they'll usually offer better fees because of that

[00:40:57] yeah and i mean it's it's kind of hard to see where this end of things is going to slow down like especially with the popularity in etfs like just how more you know retail investors

[00:41:06] are going the etf route rather than uh you know individual portfolios and stocks and i mean institutions drive most of the money in the markets i mean retail is it's a relatively small

[00:41:19] segment compared to you know institutional investors but i think still the gravitation towards a lot of people to you know buy all-in-one funds or even make up you know their own little portfolio of you

[00:41:30] know five six ETFs and i mean iShares is you know the one that is often in people's faces especially in canada i mean i know BMO is kind of coming out of nowhere and they're becoming

[00:41:41] one of the largest now but uh iShares is is certainly i think they're actually bigger than vanguard here in canada i don't know if they are in the united states but i believe they're bigger

[00:41:52] than vanguard here in canada i'm not sure yeah that's uh but yeah those are like the two names that most people will be familiar with whether you're in canada or the us then it would be obviously

[00:42:04] it would be black rock or iShares and vanguard but definitely like you said BMO is making a bit of a push i know one of our sponsors fidelity as well and in terms of asset

[00:42:14] of under management so index products are actually by far what is the most prominent here with 7.1 trillion in asset under management for index products representing 68 percent of all their AUM 25 percent is active so actively managed and seven percent is what they call cash management

[00:42:35] and by asset type equity comes first at 51 percent fixed income second at 23 percent multi asset 8 percent and alternatives at 12 percent and the remaining balance being cash management like i i mentioned so it is just interesting to uh to see and look at black rocks

[00:42:55] because it really kind of gives us some idea of where the market is kind of putting its money and during the last thing i'll finish on during the quarter they added 81 billion in net inflow so

[00:43:06] that's what i was talking at the beginning of the segment is that yes the market going up increases their asset under management but obviously inflows are new money coming in specific to the bitcoin

[00:43:17] ETF that added another four billion in inflows during the quarter making the total of 18 billion for AUM since the launch was it's pretty impressive and definitely surpassing all the kind of boldest predictions for the bitcoin ETF and the during the quarter they returned

[00:43:35] more money to shareholder as well with 500 million dollars worth of share repurchases yeah i was looking up uh i was trying to look up so xiu which is the largest ETF in Canada

[00:43:48] which would be the i shares tsx 60 ETF it's got AUM of 12.6 billion so there's more money in the single crypto ETF that i shares has then the largest ETF in Canada yeah so you can you can

[00:44:05] tell why uh larry was pushing the bitcoin ETF i mean the fees may be low but when you're talking about that many billions of AUM even a low fee can uh can really you know start making a difference

[00:44:19] at the bottom line but uh i think that's it for black rock do you want to finish with good food and then we'll wrap it up for this episode yeah so good food is kind of another one

[00:44:30] of those canadian companies that kind of reports like outside of the main earnings season um so we always end up talking about it on here but they they continue to struggle uh reported its third

[00:44:42] quarter earnings they continue to decline in terms of profitability it was a bit of improvement but the decline in revenue is something that investors should probably be concerned with because you know eventually the company is going to exhaust all of its restructuring options

[00:44:58] to the point where they you know in order to earn more money they're gonna have to generate more revenue uh volume in terms of share price like it's actually crazy to see volume has effectively dried up to the point where this company actually like poses liquidity issues

[00:45:12] there's only about $9500 in shares traded every day uh this is a company i'd look back during the pandemic so this company had around $10 million in share volume trading every day

[00:45:26] and now they're down to $9500 i mean if you want to buy and sell this thing with any sort of reasonable position i mean there's arguably not even enough volume here to do it they never hit a billion

[00:45:37] dollars in market cap but they came pretty close at around 990 million and it's now fallen to just 24 million dollars so net sales in the third quarter came in at 35 million and adjusted free

[00:45:48] cash flow came in at 4.2 million so i checked the adjustments they're relatively small so it's just about 470 000 in restructuring costs so that the adjusted free cash flow is is it's pretty close to the actual free cash flow generation by the company over the last 12 months they've generated

[00:46:05] eight million dollars in free cash flows and it's interesting because this puts the company's valuation at only three times they're trailing 12 month free cash flow when we look two year over year numbers revenue fell by 8% but cost of goods sold fell by 13% so that ultimately boosted

[00:46:23] gross margins a bit 41% to 44% they also managed to reduce their SG&A their their sales and administrative expenses by 6% and interest expenses by 9% so as a result on a year over year basis net income improved to a profit of 304 000 versus a loss of 1.1 million last year so

[00:46:45] when we look to the first six months of the year it's much of the same story however the company again it's scaled back its sales and and admin expenses by nearly 20% i mean this makes this does

[00:46:57] make sense because you know demand for the product has essentially collapsed active subscribers are falling the company's likely just scaling back marketing efforts and cutting staff i mean i used to see good food commercials all day and now i barely see any active customers

[00:47:13] fell by 11.7% on a year over year basis but the one thing that was alarming is sequentially so compared to last quarter they fell by 10.2% so a 10% drop in customers over just one quarter so this is

[00:47:27] obviously not a good sign whatsoever the huge drop off in active customers in one quarter is just likely a sign that its customer counts are going to continue to fall uh the only way this

[00:47:39] company is going to drive growth at this point is to try and generate more money from its current active customers uh so its average spend per customer did did increase by 7.9% on a sequential

[00:47:51] basis but i'd argue this isn't really you know active customer spending more it's probably more so like cheaper customers that churned which kind of boosted the average on a positive note the company reduced its overall leverage ratio so this compares debt to adjusted EBITDA from 8.2x to

[00:48:07] just 2.1x i didn't have time to dig into like what you know how that happened i mean that is a huge leverage reduction so maybe they made a change to their adjusted EBITDA because i mean to reduce it

[00:48:21] by that much and they haven't really reduced debt all that much so like i would imagine something there has changed but i can't really uh can't really guarantee it i mean at three times free

[00:48:30] cash flow and pretty much a market capitalization that equals the cash on hand i think the company has 26 million in cash on hand with a 24 million dollar market cap it kind of you know

[00:48:40] looks like a weird value play here i mean but they they have a they have a ton of debt like i think 47 million in debt i mean it's it's really hard to see growth unless there's like an

[00:48:52] immediate improvement to the canadian consumer i mean i'm not calling it a value play but on like a quick screen this company is probably going to pop up as you know something that's

[00:49:02] that's pretty cheap it has a market cap of like 23 million but an enterprise value like 45 or something i mean the the debt situation is is fairly weak and i mean we've seen it across pretty much every

[00:49:13] industry massive shifts and in spending habits i mean the struggles of empire whereas law blah is just cruising uh cost goes booming retailers are struggling you know even dollar amma is reporting you know less spending towards discretionary items i mean i would say food boxes is

[00:49:30] about as discretionary as you can get so yeah it's uh yeah unless you get a good deal for it if not it's gonna cater to probably a kind of upper middle class kind of demographic just because

[00:49:44] if not people can't afford that and they'll go for the cheaper option of making food from scratch and on the debt front i mean yeah it's increased a little bit i guess but i mean yeah it's not

[00:49:57] looking that great because the cash actually has gone down dramatically so it's uh yeah i don't know i we'd have to check a bit more dig into the debt how it's structured and you know is it convertible

[00:50:10] debt or you know is there the possibility of whoever the creditor is that when the debt comes due they'll just be like well pay up or work taking you in bankruptcy i don't know so it's

[00:50:21] definitely you know there is they've stopped the cash bleed i think we can agree with that for now but we'll have to we'll have to keep an eye on it when the earnings are bit down to see if things

[00:50:33] are trending the right way than the next quarter or two yeah like that's the interesting thing for me if you look at the long-term debt it's gone up but their leverage ratio has gone down by

[00:50:44] like 75 yeah so i mean they either had some sort of huge cost last year that bumped that up huge or they've just changed how they calculate adjusted EBITDA to the point where it makes it look a lot better

[00:50:57] it just it seemed weird to go from 8.2x to 2.1 in the course of a year with like no debt reduction or yeah odd yeah no i think that's a good point but i think uh we'll wrap it up here

[00:51:10] was it a fun episode i think it was fun to have a lot to talk about not that we didn't have fun recording the other episodes but when it's a bit slower especially those couple weeks you know we had

[00:51:20] to try and find a bit more news and earnings to talk about but i think we're back now it's gonna be picking back up for the uh i guess it would be the second quarter earnings yeah so i'm always

[00:51:32] yeah i have to always think about it for a second so second quarter for companies that are reporting more on a normal schedule maybe a bit different for others so stay tuned we'll be back every Thursday

[00:51:43] the next Thursday episode will be a bit different because dan is going on vacation for a few weeks so we're recording it early but i do encourage you to listen to it we're going to do a bit

[00:51:53] more of a dive into ETF flows in flows and outflows next Thursday uh dan does a lot of work on ETFs with stocktrades.ca so it'll be interesting to discuss there's been some

[00:52:04] interesting finding especially in the last month and then we'll go over as well for the first half of 2024 because believe it or not we're entering the second half so make sure you tune in just to

[00:52:15] see some of the trend lines that we'll see but if not i mean definitely uh follow us we are pretty active on social media i'm at fiat underscore iceberg dan at stock trades under

[00:52:27] stock trade under stock trades underscore ca there you go that's it yeah okay there you go out of brain cramps so uh yeah thanks a lot for uh for listening everyone and we'll see you next week

[00:52:39] the canadian investor podcast should not be construed as investment or financial advice the host and guest featured may own securities or assets discussed on this podcast always do your own due diligence or consult with a financial professional before making any financial or investment decisions