The Long Awaited BoC Rate Cut is Here. Now What?

[00:00:00] Welcome back to the Canadian Investor Podcast. I'm here with Dan Kent. We are back for our news and earnings episode. Pretty jam-packed today because clearly, I'm sure everyone knows by now, the Bank of Canada announcement. Obviously, we'll have a pretty substantial segment on that.

[00:00:32] We'll be starting off with that. But before we get started, Dan, aside from your sunburn, how are you feeling with the Oilers being down to nothing? Do you think they're going to have a big comeback story? I hope so. They did it in 2006.

[00:00:48] They lost three out of four to Carolina and then pushed it to game seven. So I don't know. It's pretty sad. It's pretty tough to get to the cup final and to see it go like this.

[00:00:59] My head is maybe a little bit red from the game last night as well. But yeah, the sunburn. Anybody who sees my head on the Joint TCI, it is pretty red. Yeah. Yeah, it's not his camera. It is the first thing I mentioned.

[00:01:14] I tried to leave my hat off yesterday to take a little bit of my hat tan away and I overdid it quite a bit. You know, it'll pass. Next time you'll remember to keep that hat on or put some sunscreen.

[00:01:29] But again, hopefully the Oilers kind of ride this ship, turn things around. Because I do know the feeling of cheering for a team, getting to the Stanley Cup with Montreal in 2021 and then that Cinderella story and then falling short. Although Montreal, I don't think had really... No.

[00:01:47] They just didn't have a good team. They just had like really good goaltending and people came up at the right... or people performed that the right time. I think the Oilers have a better team than Montreal did, although without Carey Price, we'll see. Yeah, it's...

[00:02:02] I mean, they're at, I think, a 9... Statistically, a 9% chance to win. So it's not looking too hot right now. But you're saying there's a chance. Yeah, I was just going to say that dumb and dumber. So you're telling me there's a chance. Okay. Well, enough about the Oilers.

[00:02:19] You know, the Bank of Canada. So you had Tiff McClem and Carolyn Rogers that were at the press conference. They actually made reporters laugh because they had the little Oilers pin. And one of the reporters asked about that.

[00:02:33] So that's my attempt at a segue to the Bank of Canada raid announcement. But clearly everyone knows at this point that they cut raids by 25 basis point. It was always a possibility. We talked about it.

[00:02:47] I mean, in terms of what the markets were predicting, it was all over the place. So here are my key takeaways. I listened to the press conference actually probably like a couple times all in all, because I was listening to some of the questions, some of the statements.

[00:03:02] I would mark it down and then as I was doing my notes, kind of going back and just listening again to what they were saying. I like doing that stuff. I know for some people it's boring, but I do enjoy that.

[00:03:12] In their opening statement, they said that they are confident that inflation is moving towards the 2% target. CPI, core inflation and the proportion of components increasing more than 3% is getting closer to a historical average. It's reasonable to expect further cuts, but their decisions will be taken on a meeting

[00:03:33] to meeting basis just based on data. There are still some significant geopolitical risk, risk that housing prices push higher as well following this rate cut. And if wage keep increasing faster than productivity, that's another risk as well.

[00:03:49] And I think it's important to put emphasis on them saying that there are still risks because if you look at headlines from mainstream media, it's almost a given that now we're like full on in a rate cutting cycle and essentially rates are just going

[00:04:05] to be coming down just rapidly in the next few meetings, which is definitely not what they said. And I know some of these articles are more nuanced when you read the articles, but

[00:04:15] it is it is very clear that they're using the rate cuts as click bait for people to think that things are all of a sudden going to change because there's a 25 basis point change in the interest rate.

[00:04:29] Yeah, the one I was reading an article this morning that said three to four more cuts by early 2025, which I mean, is pretty optimistic. Yeah, I mean, especially if the US stands pad like they can deviate a bit.

[00:04:43] But I doubt you're going to see like four rate declines if the US stands pad, which is looking like what they're going to do in the next meeting at least. But yeah, I don't know.

[00:04:53] They there's a lot of talk about like, you know, home buyers now is the opportunity rate cuts are going to continue to go down. But really, a 25 basis point cut is it's not that much. In reality, fixed rate mortgages are still nearly five percent.

[00:05:10] I think variables are just ridiculous. Like they're so high right now. Yeah, variable rates are still high, but they have gone down. So this affected the posted rate at banks. So clearly the variable rates also, HELOCs will likely be, you know,

[00:05:25] coming down as well because it's the the prime rate for the banks and then for the variable, it's minus prime rate, minus a certain amount. So there is some, let's just say some burden that will be slightly less for those who have those variable rates mortgages.

[00:05:45] But it's not going to make a big difference. I know you kind of crunch some numbers and, you know, the amount is I'm sure it will help, but it's not big. Yeah, they had I was reading something that said for a variable rate

[00:05:58] mortgage, the savings will be about fifteen dollars a month per hundred thousand. So, I mean, you're talking, what would that be on a four hundred thousand dollar mortgage, maybe sixty, sixty bucks a month. But I was looking just at fixed rate numbers.

[00:06:13] And I mean, the talks of how, you know, this could spur the housing market, I mean, I just put it into a simple like Scotiabank mortgage calculator. And on a four hundred thousand dollar mortgage, yeah, it's on a fixed rate

[00:06:26] mortgage is going to save you about fifty eight bucks a month. The difference between, you know, previous and a and a decline, which is a savings. But I mean, I don't really think it's going to cause people to rush into the housing market.

[00:06:38] And I did they did do a survey. And I believe they said that six out of ten buyers would consider reentering the market when rates start to decline. But only one out of ten buyers would have found a twenty five basis point decline enough to cause them to.

[00:06:57] These are pretty much buyers who stopped even looking during the rate rise. And only around 10 percent of them said that this would cause them to reenter the market just because the savings are so small. Yeah, and it's important to when you see these headlines out saying like,

[00:07:15] oh, you know, 50 percent of home buyers will be looking to purchase. Like I'm just throwing numbers out there. But a lot of the time, they don't really use the numbers correctly. I think that's important because you have to first establish

[00:07:30] what percentage of the Canadian population or adult population is actually looking to buy a home. Yeah. And then from that percentage, you know, which percentage is actually able to buy a home and has sufficient funds to do so.

[00:07:44] And then you start drilling down on what percentage of that portion of people is actually going to reenter the market if there is a rate cut. But again, it could be, you know, they the question wasn't answered

[00:07:57] or asked properly and people think like in their head, well, yeah, I'll enter when it's down 100 or 150 basis points. And then they kind of use that data and then it creates this false impression that people will be rushing right away to buy a home

[00:08:13] with rate cuts. But some of the other key takeaways. So first, I would say first impression is that I'll be honest and very blunt about this. I think some reporters like should not be there. Their questions are simply a waste of time.

[00:08:27] Honestly, I found myself like rolling my eyes as the governor and the senior deputy governor were there listening to the question. In case in point, the very first question from CTV was asking about July rate cuts when they explicitly said

[00:08:44] just minutes earlier that they would continue to be data dependent and that the decision to maintain or cut rates would be taken on a meeting to meeting basis. I could have told you exactly what they would answer once they got the

[00:08:58] the question, and there were also other reporters who asked the same question, not necessarily this one, but questions that were asked already multiple times and then a third and four time. Just wondering if there would be some kind of different answer.

[00:09:12] And it is frustrating because I want to get listen to these meetings and get value out of them. And when those kind of questions are being asked, I can literally predict what they will be answering. The Bank of Canada, whether it's Tiff or Carolyn Rogers.

[00:09:27] They're just kind of looking for some sort of different answer to probably get a headline or something. Or I mean, I don't know what else it would be. Like they say it's going to be data dependent, and then they ask about a July rate cut anyway.

[00:09:39] I mean, I didn't actually get a chance to listen to this Q&A, but I'm not necessarily surprised. No, I'm not surprised either. I mean, they've been doing the same thing since the beginning of the year or even last year. Right.

[00:09:50] So if you watch a few of these meetings and you'd hope that these reporters actually watch the replay afterwards, like you can tell what they will and what they will not answer. Like it is so easy. And I don't know if it's a lack of knowledge

[00:10:06] or just them being pressured by their editors or whatnot to ask about interest rates. I just don't know whether it's a lack of knowledge or just clear incompetence. I quite don't know. But at the end of the day,

[00:10:18] I think they should be sending people there that has pertinent questions. And there were some, thankfully. Yeah, I mean, I would imagine that's some of the pressure. I mean, they just like I said, they need they need content. They need a headline.

[00:10:31] They need, you know, a definitive answer. Like data dependent isn't exactly a good headline grab, whereas, you know, if they say something else, which they're never going to. I mean, they're never going to give an answer to that, especially when they've stated it previously. Exactly.

[00:10:47] It's so it's the same in a lot of interviews. I mean, they just kind of poke and try to get answers, which, I mean, that's kind of their job to an extent. But yeah, I just I wish they would be better prepared

[00:10:58] or send reporters that actually know this stuff better. That's you know, that's my little rant here. Some other takeaways here. So the BOC is aware that it cannot diverge too far from the US Fed. TIFF said that Canada has its own currency and that the Bank of Canada

[00:11:15] will make its decision based on what is best for the Canadian economy, while acknowledging that there are limits on how far Canada can diverge without specifying what the limit was. In other words here, he was also saying that, yes,

[00:11:29] Canada has a free floating currency against the US dollars. And I think they understand that the Canadian dollar will take a hit in the short term if when they start diverging, which they have. And I'll show some charts a bit later on.

[00:11:44] But as a Canadian dollar has been weaker since the announcement, I think it's also clear to make it clear for people. The divergence will not be the only thing that will impact the Canadian dollar. I think that's important. For example, if the price of oil goes up,

[00:11:58] there's going to be an increased demand for Canadian dollars just based on that. So I think it's just some just to take these things in context. Oil can actually soften that blow or increase it if the price of oil

[00:12:10] actually goes down and it could lower the demand for Canadian dollars. So I think that was interesting, but they clearly did not want to say what they thought the limit here was. The other thing was a soft landing is still the target,

[00:12:24] but the plane still hasn't been landed. So this is what so this is what TIFF McClimbs said. Basically saying that growth had slowed and avoiding a downturn was still a possible outcome or probable outcome, but it was not a guarantee.

[00:12:41] There was actually a very good question by a Japanese reporter who asked why the Bank of Canada was cutting rates while doing quantitative tightening. Now, QT, I'll just put a reminder here for people that are

[00:12:53] maybe don't know this stuff as well or kind of new to the podcast. So QT, it's the opposite of QE, which is quantitative easing, is when central banks reduce the money supply and decrease liquidity in the economy by selling off assets or typically

[00:13:08] predominantly government bonds or letting them mature without reinvesting those proceeds. So TIFF said that the policy is still restrictive and stopping QT and going back to QE would be more appropriate in this scenario that they're trying to stimulate the economy,

[00:13:25] which is not really what they're trying to do based on his answer. They think that they'll be back at QE at some point next year, but unsure of exactly when. And then one last key point here before I go in terms

[00:13:39] of what the potential impacts will with that decisions we'll have on, you know, the Canadian economy and housing and so on. Well, housing is a risk to their inflation forecast. And Carolyn Rogers actually took that question and her answer was very telling.

[00:13:55] And I quote here, it's clear there is some pent up demand in the housing market. We'll see how it goes. Literally, that's what she answered. So they don't know this is like. And I mean, it's fine. Like a lot of the time, the central banks don't know.

[00:14:11] Economists don't really know either. So we don't know either. But this last last quote to me was very telling that they are aware that this could be a risk and they will kind of play a wait and see.

[00:14:25] So those who want prices to go up or, you know, the real estate industry and so on, be careful what you wish for, because that could be the drop that tells them to like, OK, we will kind of put a pause on the easing here

[00:14:42] and on the lowering of rates. Well, I think I was reading too that like after the after the rate hike, there was like a surge in new homeless things, like particularly in Ontario. Like I don't know if this is a situation where like people are trying to list

[00:14:57] and, you know, anticipating like an increase in market activity or maybe it's like people who are listing now because maybe they expected a bit more aggressive cuts and they just, you know, maybe can't afford the current home they're in.

[00:15:10] I don't know. It's it's kind of an interesting dynamic. I mean, I don't really think a 25 basis point cut is going to cause. Like you said, it's not going to cause craziness in the housing market. I don't think it's it's not really going to change costs that much.

[00:15:25] But I don't know if you can't if you couldn't afford a home 25 basis points ago, you can't afford one now. It's not that material of a of a decrease. If they went down 50 basis points, then it might, you know.

[00:15:39] Yeah. A lot of the time to like, keep in mind, if the person didn't have enough of down payment like prior to the rate cut, they're not going to have enough of a down payment post rate cut. And if they couldn't meet the the ratios to get approved

[00:15:54] for the stress test, 25 basis point is likely not going to be the deciding factor here. And, you know, if it is, I think there's some that's pretty worrying because they're literally going straight up to their limit if that's the deciding factor for 25 basis point,

[00:16:11] which could create some more problems down the line. And I think it's a lot of it is just I've talked to a lot of realtors. Some are very good, some be very blunt or terrible. And they don't know what the hell they're talking about.

[00:16:23] And they I've heard like I work with a realtor in Ottawa. And I was kind of just, you know, asking him, getting his opinion on, you know, what buyers are kind of doing right now. And a couple months ago, I asked him this question.

[00:16:38] He said, oh, people are literally like buying because they're expecting the Bank of Canada to cut. And that prices will go up. That's what he was telling me that buyers were actually saying. And I mean, they're getting fed this information,

[00:16:51] whether it's mainstream media or TikTok videos from realtors that are kind of pushing that FOMO out when they actually have not done the math and understand like we just did. So some simple math earlier in terms of what the impact it will have.

[00:17:06] And they don't understand that fixed rates are actually not decided by the Bank of Canada. They're decided by the bond market. Yeah, they haven't really moved all that much. Like I've kept an eye on it a bit. Obviously, variable rates come down, but they're still like

[00:17:20] it'll be interesting to see, like if there is buyers, if they choose to go the variable route, just expecting more cuts. But like the way I was looking at it, variable rates are are so much higher right now than fixed rates that it's a huge gamble.

[00:17:34] Like I think I was there was a fixed rate. I think it was I think it was four point eight percent. And then the variable rates were like six. So, I mean, you would need a pretty big decline to,

[00:17:46] you know, level that out rather than, you know, locking in that that four point eight percent rate. I mean, it's a pretty tough gamble right now. I mean, Alberta, the one thing I could see this at 25 basis point cut impacting is here in Alberta,

[00:18:01] like our real estate market is going bonkers right now. And, you know, the houses are still reasonably affordable here relative to like Ontario, B.C.. So I wonder if that kind of spurs our housing market, because where I'm at, you put a house on the market

[00:18:19] and it's gone like in less than a week. It's pretty crazy here. They're just getting bought up like crazy. Yeah. And also the calculation for variable versus fixed rate. A lot of people don't realize that they'll go for variables. So there's a big gap.

[00:18:33] There's still a wide gap between the two. So let's say you compare the variable for five years versus fixed for five years. Well, you'll have to make sure that by the time the variable comes down lower than what you would have gotten for the fix,

[00:18:47] you'll have enough time to make up that higher interest that you paid for that time duration for the rest of the term. So if the rates goes down below your five year fix in four years,

[00:19:00] I'm going to go on a limb and say that the five year fix was a better deal. And I think that's where people have to be very, very careful. You're essentially gambling on that. And, you know, it's fine if you can't afford it.

[00:19:13] You're stable financially and you can handle those rates. But if you want certainty, obviously the fixed rate does offer you that. So I think it's important. And here I have for a joint TCI. So you'll see the last three months of the five year Canada bond.

[00:19:28] So it was definitely downwards towards the Bank of Canada rate cut announcement, and then it's been slightly up ever since. So just goes to show that, obviously, I think the market was probably starting to price in a rate cut. So you have to give that as well.

[00:19:43] And there is a correlation between what the Bank of Canada does and the five year bond. Historically, there has been. But again, going forward with more and more debt and more and more spending from the Canadian government, there's no guarantee

[00:19:57] that the bond market will kind of act in a similar fashion than the Bank of Canada. Maybe at some point there is just a lack of demand for Canadian bonds and the yield goes up, even though the front end of the curve.

[00:20:11] So the Bank of Canada rate goes down just because people don't want to hold the five year duration and then interest rates go up. So I think people have to be really careful with assuming what happened in the past will automatically happen in the future.

[00:20:23] Could very well be. But this is what will dictate the five year rate. And then you have here the Canadian dollar against the US dollar. So the chart that I have here is the past year clearly were pretty much at the lows of the past year.

[00:20:39] The only other time it was as low as it was in kind of October, mid-October of last year. We can see the Canadian dollar has definitely weakened since the rate announcement. And like we said earlier, I mean, there it's not the only factor,

[00:20:53] but it is something that's playing into that. So it is I'm sure like they say that their focus is inflation at the Bank of Canada. But again, there's no guarantee like, you know, they won't let the Canadian dollar in free fall either. Right.

[00:21:08] So there is probably a limit to where they'll let the Canadian dollar go down versus the US dollar. And clearly that limit may be a bit unknown for them right now. It may be that they start noticing that the weaker

[00:21:22] the Canadian dollar gets, the higher the inflation starts picking up. And then they say, OK, we can't deal with this anymore. We have to stabilize the currency. And because of that, they actually stop the rate cut. So there's a lot of different outcomes that could happen going forward.

[00:21:36] Clearly, you know, rate cuts are still possible. They've said so if the data is correct. But I would, you know, I'm more of a conservative person when it comes to this kind of stuff. I don't like to assume any one way or another.

[00:21:49] I like to think in probabilities. And it's definitely not a surefire guarantee that they will be cutting at their next meeting. Nope, definitely not. I mean, I've been buying a lot more US dollars.

[00:22:00] Like I typically used to just lump some a lot of my R.S.P.s into US dollars. But now I just buy it every week, like half of my weekly contributions. I just convert the US and contribute to it.

[00:22:12] So I'm not particularly bullish on the Canadian dollar. I mean, it's fallen, I think it's fallen three or three and a half cents just this year alone. It's it's going to be interesting moving forward, especially like like I said earlier, if the Fed stands pat,

[00:22:28] like what does the Bank of Canada do? Like how far can you deviate? Do they go, you know, 50 basis points lower, a full percent lower? I don't know. It's going to be interesting. Yeah, I mean, I agree with you.

[00:22:41] I mean, I've been saying on the podcast probably for a couple of years now as I keep most of my cash, I would say like two thirds, three quarter. I keep it in USD in short term treasury bills in the US. So that's what I do.

[00:22:53] I mean, my portfolio has been doing quite well because of the currency effects that are playing for me. But that's why I've been a pretty big proponent is that, you know, at the end of the day, the US is the reserve currency. The Canadian dollar is not.

[00:23:06] But I think we've talked enough about the BOC decision. Do you want to switch gears and talk to us about another type of dollar here? Yeah. The dollar tree. Yeah. Dollar tree. Exactly. I think I thought that was pretty good. It is very good transition. That's two now.

[00:23:24] That's two. Yeah, too. So I figured it would be a good company to talk about just because of how well Dollarama has been performing as of late. I think they report tomorrow. It's either tomorrow morning or maybe tomorrow on the close. I'm not sure.

[00:23:37] So Dollar Tree earnings kind of highlight how well Dollarama has performed as of late because the results are like their night and day. So Dollar Tree reported same store sales of one point seven percent and earnings per share declined by two point seven percent.

[00:23:54] So they reported a two point eight percent increase in foot traffic, but it's store to its stores, but a zero point eight percent decline in average ticket price. Thirty basis point increase to gross margins. So they sit at thirty point eight percent.

[00:24:07] And the company said the bulk of the increase was just due to a decline in freight costs. So this is pretty interesting. The company reported a seven point four percent same store sales increase in consumable items. Whereas discretionary items

[00:24:22] reported a same store sales decline of three point two percent. This is the first time that they've reported a discretionary item. Same store sales decline since twenty twenty. I'm not exactly sure. I'm trying to think of like discretionary items at a dollar store.

[00:24:40] Like they're I mean, like I bought my daughter a little kind of soccer ball toys. Yeah, I would qualify as a discretionary item. Kind of all the Canada Day like for Canada here, like, you know, Canada Day stuff that you can buy lawn stuff like. Yeah, yeah.

[00:25:01] There's I would say half of the store is probably discretionary. Yeah, I just couldn't put my like head around what is discretionary in there because typically I only go I don't really go to dollar ram all that much, but when I do, it's for just staple items.

[00:25:14] I mean, I'm not much of a you know, I don't go there to buy birthday party decorations and things, but I imagine that's what people are scaling back on. Or you can buy like single serving crab dinner or something.

[00:25:25] I feel like everything is kind of a miniature serving. But again, it's it's decent value for people. Yeah, it definitely is something I get it. Yeah. So, yeah, I mean, we don't have dollar am as most recent quarter.

[00:25:38] As I said, they're going to they're going to report tomorrow, I believe. Dollar am in their last quarter, so they grew same store sales by 8.7% and earnings per share by 26.7%. So as I mentioned, like night and day in terms of in terms of like

[00:25:54] overall results and Dollar Tree's operating margins came in at 5.5%. Well, dollar am is are more than five X this. So they're they're 28%. So as we meant, like we were discussing this before, but it's probably an element of competition.

[00:26:10] There's a lot more competition in the US than there is in Canada. I mean, we do have Dollar Tree's here here, but they're fairly limited. Like I would say for every Dollar Tree I've seen, I've probably seen like ten dollar am as like dollar am as they're just

[00:26:24] all over the place here. So Dollar Tree acquired Family Dollar in 2019, which is another discount store. It ended up being a pretty big bidding war back then, I guess. They paid nine billion dollars for it. And there was it. There was a ton of competition surrounding the offer.

[00:26:41] And I think the price kind of got jacked up as a result. So the company is now either looking at spinning the company off, selling it or even disposing of the business. So on the quarter, Family Dollar reported same store sales growth of just 0.1% effectively no growth.

[00:27:00] And it had to close down. I couldn't actually get the time span. It had to do this. But apparently it's had to close down over 970 underperforming Family Dollar stores. So obviously this acquisition, they have not been able to synergize this at all. It's been pretty rough.

[00:27:21] They released fiscal 2024 outlook. It expects sales of 31 to 32 billion dollars and earnings per share of 650 to 7. So this would be growth in the mid single digits compared to the previous year. And it plans to expand more items into its dollar 25 and greater segment,

[00:27:40] kind of highlighting the fact that it's probably pretty tough to operate a dollar store right now to keep the actual like true element of that. I mean, just with the rising costs of everything. And I know this was probably three, four years ago.

[00:27:53] But I remember Dollarama started doing this like they started raising the prices on their items and they took a lot of heat for it. But it's working out pretty well in their favor right now. And again, just soft the earnings by Dollar Tree right now

[00:28:08] and just how the deviance between Dollar Tree and Dollarama. And I'm pretty sure they offered. I mean, I've been in both stores and they're pretty much the same offerings. Whereas, you know, a lot of people think like Dollar General.

[00:28:20] But Dollar General isn't, you know, a pure play dollar store. They offer a bunch of other stuff and they've really struggled as well. But Dollar Tree is a pretty close comparable to Dollarama. And the results are just it's crazy how different they are.

[00:28:32] Well, if you look at the chart I pulled up here, so it does show the two segments. So Dollar Tree and Family Dollar. So you can see like what you were saying. So Family Dollar essentially stagnating. Yeah. And then Dollar Tree, there is still some growth there.

[00:28:47] So I think that explains in a nutshell why they're probably trying to sell those off or whether it's get rid of them or just keep the banner, but maybe revamp it and reduce the number of stores because they haven't been performing.

[00:29:02] Yeah, I'm not really sure what they said. They had mentioned spinning it off. I don't exactly know what a spin off would do, but I don't know. Yeah, I mean, it wouldn't look as bad on their balance sheet. Exactly. They can get it, get it off.

[00:29:15] Yeah. Get it off Dollar Tree and and separate it. But yeah, that looks like a pretty bad acquisition because you're nine years into it and you're looking at dumping it off pretty much. So yeah, interesting quarter. Yeah, no, definitely. And it'll be interesting to see what the dollar

[00:29:34] Ramas does at this point with our releases in terms of their earnings. Sorry to bet against all around. They're they're not cheaping at trading at a cheap valuation. But I mean, they've performed and I was listening to I think it was the food professor was talking about dollarama.

[00:29:51] And what they tend to do is just they tend to have just like one product per category. So, for example, you'll have like one peanut butter, not five different kinds. You'll have, you know, you might have a few different kind of chips,

[00:30:04] but they tend to limit, which helps them kind of fulfill. It makes it much easier for them to in terms of the fulfillment for each of their stores. They have more consistent offerings and it makes managing everything much easier.

[00:30:18] So I don't know if Dollar Tree does kind of a similar approach, but I know that's one of the reasons why they've been able to be so efficient. That's pretty interesting. I didn't even know they did that.

[00:30:30] I mean, the one the one thing that I would say, maybe it's like maybe they're operating better just because I mean, probably in general, the Canadian consumer is a bit weaker than the US. They're having to cut back a lot more and which is why the foot traffic

[00:30:45] and the earnings growth and the revenue growth is so strong at Dollarama right now, but they're they're killing it. Yeah, the US customers, they're switching to Walmart and then next step will be dollar. Yeah, yeah, exactly. They still got one more step to go.

[00:31:00] Yeah, but I know I do go to Dollarama once in a while and you know, Walmart as well, because it's you know, you can find everything when you don't feel like buying extreme quantities at Costco. Yeah, I Costco is my main thing.

[00:31:15] My my wife loves Dollarama, but I don't go in there too often. I wait in the car. You wait in the car. OK, OK. I go with the stroller. The toddler loves going in stores, so I bring her there. But I just get by the toy section.

[00:31:30] If not, I'll come out with toys every single time. So we'll move on here to Lululemon. They released their Q1 earnings, so I'll be comparing here on a year over year basis because a company that's like a retailer like Lululemon, it's definitely there is a seasonality behind it.

[00:31:49] So I think it makes sense to look at year over year. Overall, I think the quarter was better than I thought, especially with the change in the chief product officer that we talked about a few weeks ago. So I'll go over this and it was an interesting quarter.

[00:32:03] I'll just say that I do own shares of Lululemon, have owned them for quite a while. I did add recently in hindsight, probably should have waited. But you know, it is what it is. You can't time the market and the valuation seemed pretty attractive.

[00:32:16] Net revenue increased 10 percent to two point two billion. This was actually on the high end of the guidance as they were guiding between nine and 10 percent. America's revenue, which includes obviously Canada and the US, increased three percent. So comparable sales were flat in the Americas.

[00:32:32] I listened to the call. They said that they missed a mark in the US, especially when it came to the women's line of product. Obviously, women's line are still the majority of their sales. It sounds like it wasn't the reason for the departure

[00:32:45] of their chief product officer, who they said took a job elsewhere. Having said that, I'm a bit kind of wait and see in terms of that, just because it is a little concerning that sales are essentially flat in their first and third market in terms of importance.

[00:33:03] Their membership program has now 20 million members in North America, which they believe they can better leverage. International revenue was really what helped their quarter. So comparable sales. Well, actually international revenue was up 35 percent and comparable sales were up 25 percent. They mentioned that mainland China led the charge here.

[00:33:25] Revenues in China increased 45 percent. China's revenue is now greater than Canada for the first time. So if people maybe have picked up on it, it's like Canada has always pretty much been like ever since the US kind of took over as their main market.

[00:33:41] Canada has always been the number two in terms of sales. But now we're seeing something different here. And on the call, they said that international business is now roughly 21 percent of their revenue. But they mentioned that it is under penetrated

[00:33:56] and that they could see this becoming 50 percent of their revenue longer term. And I did I'll share something with our joint TCI listeners here that we'll be able to see. So the chart here that I'm showing shows a couple different things.

[00:34:10] I know it's a little bit blurry, so I explain it. So in red, you'll see the US revenues, Canada revenues in blue and then mainland or People's Republic of China revenues in orange. And then you'll see you'll be able to see quarter by quarter.

[00:34:25] You'll see the orange section that is increasing, increasing. And the latest quarter was the first quarter where it surpassed Canadian revenue at three hundred and forty six million versus two hundred and eighty nine for Canada.

[00:34:38] I expect that this will is basically how it's going to be going forward. But I mean, it is interesting to see. Obviously, there are some risk involved with China, and that's something to keep in mind. But they are just starting in China.

[00:34:53] So it I'm kind of mixed on it. Obviously, the hit's something to keep an eye on. But again, it's one company that I like. But the fact that growth is a bit stagnant in North America right now and they're more reliant on the international front

[00:35:11] is definitely one that I'll be keeping a close eye on. I mean, I was already because I own it. But even more so now that their core market is slowing down and it's just a new markets that are expanding.

[00:35:22] Yeah, there's been a lot of like just off the top of my head. I can think of like three or four companies who, you know, they're kind of prioritizing China as like the main main growth market. I mean, we saw with Canada Goose, which ended up

[00:35:35] kind of being a disaster. But that was mostly pandemic related. I mean, I imagine they would have continued momentum there if Covid hadn't hit. But Jameson Wellness is another like a vitamin supplement company that's, you know, targeting China. Huge Starbucks. It's such an untapped market.

[00:35:52] Like you have to think like there's a lot of room for Lululemon to grow there. I mean, you think of the population difference and they just exceeded Canadian revenue with Chinese revenue. So there's probably a lot of growth there. Yeah, it is.

[00:36:06] I mean, there probably is, but it's hard to kind of get a comp, right? Because Starbucks already has so many stores in China. Canada Goose, I would argue it's more on the higher end of luxury. Starbucks may be in a similar segment to Lululemon

[00:36:21] when you think about like luxury, right? I'm just obviously they offer coffee. I understand that. But in terms of the way people perceive it, it's more of an affordable luxury. I think Lululemon is probably a bit more in that category.

[00:36:36] It's just interesting to try and figure out how it's going to go. And they're very, very new there. So maybe there is definitely more growth opportunities than some of the other companies that you mentioned. Yeah. And I mean, it's the one interesting element is like

[00:36:52] if we compare this to a company like Aritzia, I mean, they're mostly they've avoided all of that and they're mostly going like hard on on US expansion and they kind of hit similar. Well, this was probably a year ago now, but their US revenue exceeded their Canadian revenue.

[00:37:07] But I mean, the population is just so small here. It's going to be one of the smaller segments, no doubt, especially when you have the US market and just the US population and the China population. But it'll be interesting to see how they grow there moving forward.

[00:37:22] I mean, obviously, the brand is probably not as developed over there than it would be in North America. So we'll see. Yeah. And in terms of the numbers, the rest of the number, I think everything looked quite good. The gross profit margins were up 20 basis points.

[00:37:39] Operating profit margins were down 50 basis points. So not as great, but, you know, still nothing to get worried about. EPS was up 11 percent to two dollar fifty four. It also came in well above their guidance range of two dollar thirty five to two dollar forty.

[00:37:54] They opened two new stores during the quarter and their store count has grown from six hundred and sixty two to seven hundred and eleven in the span of a year. Free cash flow was flat, but it's much better than it was last year. At the same time.

[00:38:08] Well, actually not last year, but it was essentially flat. They bought back two hundred ninety seven million worth of stock during Q1 and announced that they would approve an additional one billion in their stock buyback program. So clearly, I think there is a view that the stock

[00:38:22] might be a bit undervalued from management here at Lululemon. And for the second quarter in terms of guidance, they are guiding for nine to 10 percent in sales growth once more. They said that the 2024 outlook remains unchanged for the full year,

[00:38:37] and they are guiding for EPS to be between two dollars ninety two and two dollars ninety seven. So all in all, I would say it was a pretty good quarter or OK quarter. Whatever you want, you know, whatever people kind of place it there.

[00:38:53] I think it was better than expected. I do think it's a bit alarming, the stalling growth in North America. I'll be very honest. But again, the growth internationally is something that's quite positive. So that's kind of the gist of it here for Lululemon.

[00:39:09] Anything else before you want to transition to to some cheese here? No, that's it. I don't have anything else. OK, let's do it. Good summary. But yeah, Saputo. So they, Saputo really continues to struggle. So they reported revenue of four point five billion

[00:39:27] and earnings per share of thirty seven cents. So both these numbers topped estimates, but the company's earnings just continue to decline. It's like a slow bleed over, you know, nearly a decade long period. Its Canadian segment reported three point one percent growth

[00:39:44] in revenue and three percent growth and adjusted EBITDA. Its U.S. segment, which is the largest, I believe it made up around just under two billion of the of the four point five billion. So it reported a six point five percent decline in revenue,

[00:39:59] three points, five percent decline and adjusted EBITDA. And its international segment posted pretty strong growth with revenue up pretty much 18 percent on a year over year basis. But in terms of margins, it's the lowest margin segment of the business.

[00:40:12] So the growth, you know, it doesn't really have a huge impact on earnings. To an extent, it does, but not as much as, say, the drag that its U.S. segment is having on earnings. So year over year, earnings are down by 21 percent.

[00:40:25] Revenue is up one point seven percent. And we look when we look to the total fiscal 2024. So this was Saputo's Q4 earnings report for 2024. Revenue is down two point eight percent on the year and earnings fell by nine point four percent. So despite growing revenue by 50 percent since 2018,

[00:40:44] net income has fallen by 70 percent. Operating margins over that time frame have gone from 10 percent to just under four point nine percent today. Free cash flow per share since 2016 has dropped by 15 percent. They released their fiscal 2025 outlook, but it was pretty vague.

[00:41:03] It states that although inflationary pressures are going to continue to decline, labor costs will likely remain high and expects flat to even possibly declining demand for dairy products in the United States and internationally due to the macro environment. It's bullish on its European segment,

[00:41:20] but it makes up a very small portion of the revenue, just a bit more than five percent. And the stock over the last 10 years has provided 14 percent total returns. So this would have required you to reinvest dividends for over a decade.

[00:41:35] It works out to be about one point three percent annualized. So I mean, I can't imagine input costs are are going to come down by any meaningful amount. So it's pretty hard to see like how the company could turn things around at this point.

[00:41:52] And for a while, this was like a blue chip Canadian stock. I mean, it's it's got a huge market share in terms of, you know, dairy, cheese. I mean, creamers, all that type of stuff. But it's gotten thrashed over the last 10 years, for sure.

[00:42:08] Yeah, I'm showing here the returns in the last 10 years between the XIC, which is the S&P, TSX index fund, Captain Dex and Saputo. And it's quite the diversion. So the index if you just invest in the TSX, not even obviously the S&P 500,

[00:42:26] which would be even worse for Saputo. And the TSX would be one hundred and one percent or 102 percent if I round up. And you have Saputo that's trailing at 14.7, 8 percent. So not that great in terms of return. Pretty much been sideways.

[00:42:44] And obviously you've lost purchasing power during that time frame, unfortunately. Yeah, I mean, you could tell a lot of it was post pandemic, which I would imagine, you know, is factoring in higher input costs. Like margins have just gotten demolished.

[00:43:01] Like I said, they're half of what they are now, which is probably hitting earnings quite a bit. And just overall, like if they're already, you know, slowing this badly and then they expect it, they expect dairy product demand in the US,

[00:43:16] which makes up half of its revenue to continue slowing. It's it's hard to see a turnaround for sure. Yeah, it's all those weight loss drugs. Yeah, people are not eating anymore. Nobody likes cheese anymore. Yeah. Yeah, exactly.

[00:43:29] I mean, my personal experience with them just on a consumer basis is that I think I was telling you that not too long ago. So I I was at the La Blas nearby and I was looking at cheese. And usually I buy it at Costco.

[00:43:42] I wanted mozzarella cheese to make a pizza. And there the Saputo branded cheese was like a buck less than, I think, the no name brand from La Blas. And I got OK, like it's probably even better, right? Like it's Saputo. I might as well take it.

[00:43:58] Worst mozzarella I've ever had. I like I was like, I will. It was so chewy, like it was rubber. Like it was so bad. Like I ended up we used it because I didn't want to throw it out. But too expensive. I well, yeah.

[00:44:13] And I mean, I just just from a consumer perspective, I was like, I tried it. If it would have been good, I probably would have bought it, you know, once in a while if I didn't have anything at home.

[00:44:24] But it was I don't know if it was a bad batch, but I definitely will not be buying some Pudo cheese again, because I thought like that was their specialty. Right. So that's well, they have. But I'm almost positive.

[00:44:38] So I buy cheese from Costco pretty much exclusively because like the price is just absurd for what you get relative to even something like La Blas. And I'm pretty sure I can't guarantee this, but I think Costco or sorry,

[00:44:51] Saputo does make the Kirkland cheese, which is pretty good. It is a good. Yeah, yeah. No, I've had that one. So that's what I was wondering, too. But maybe they give Costco the good stuff and keep the craft for their own brand.

[00:45:04] I don't know. Yeah, it's I mean, it's a pretty short segment because there's not really much to talk about. But it hasn't been good for them over the last while. Well, we'll finish here with another Canadian company. So definitely a decent amount of Canadian content today.

[00:45:20] So BRP earnings, so revenues of two billion, a decrease of 16.4 percent compared to last year. And for those not familiar with BRP, just think of like Ski-Doo, stuff like that. They're the ones that make that their power sport year round,

[00:45:37] which includes ATVs, all terrain vehicles, side by side vehicles and three wheeled vehicles. Saw sales increase nine percent to one point three six billion. That's as good as it gets for the quarter. Basically, everything else was really bad. I'll be very honest.

[00:45:54] Power sports seasonal, on the other hand, saw sales decline of 38 percent to 953 million. Obviously, I'm going year over year because there is cyclicality around this. This includes things like Snowmobile, for example. They're operating expenses increase four point two percent during the quarter.

[00:46:12] So not great when your expenses increase four point two percent and your sales decline 16.4. It's kind of a double whammy here. And because of that, they had a net loss of seven point four million compared to profits of a hundred and fifty four million last year.

[00:46:27] Now, there was some interesting takeaways from BRP. I listened to part of the call, not the whole thing. So their results were in line with their expectation. They are focusing on managing inventory with their dealership network. Dealers are more cautious with inventory because of

[00:46:44] uncertain economic conditions and a higher rate, which are impacting them more than expected. Dealer margins are under pressure as they are selling at lower prices to move inventory. And because of all of this, they are adjusting their production to further reduce dealer inventory.

[00:47:01] Overall, they said that they were doing well compared to the industry. But I think it's clear that people are cutting back on these type of non-essential large expenses, especially as we talk. Interest rates remain high, whether it's in Canada or the US.

[00:47:17] And they also said that this year will be a transition year because of the headwinds they are experiencing. Now, what really was really bad, I mean, was the guidance. Like it was it was as bad as it gets.

[00:47:30] I do feel bad because I know some people own this stock. I can't remember. Do you own it, Dan? I own it. Yeah, I actually really own it. Yeah, I do own it. So you do own it. You probably did not like the guidance.

[00:47:43] No, but I mean, it was largely expected, I guess, in the share price. Like despite like a huge revision downwards, the share price hasn't really moved all that much. I think it's down single digits from this quarter. So, I mean, it was probably priced in.

[00:47:57] Exactly. So the market, because the stock has been obviously kind of going lower over the last, what, six months to a year, I think, approximately. So I think the market was definitely, you know, expecting something like that. But the guidance wasn't good.

[00:48:12] And they also revised it significantly down versus what they had previously issues just like three months before that. And they had some questions on that during the call from some analysts. And revenue guidance for fiscal year 2025 was revised down by six percent. If I'm using the midpoint here,

[00:48:31] normalized EPS guidance was revised down 16 percent. And then income guidance was revised down 30 percent. So it's never great. I know I'm not a shareholder. I know you are, but I'm going to ask you a question. We didn't prepare this, but what do you do if they revise

[00:48:48] guidance down again next quarter? Because that would not be a good look. Yeah, no, it wouldn't. But it's like you have to expect a company like this to be cyclical to a degree. And I think it's getting it's also getting hit a little bit harder

[00:49:03] just due to like how warm of a winter we had. So I know if you isolate out like snowmobile sales, like everything remained like relatively stable, like their ATVs and all that type of stuff, like the non seasonal stuff still sold pretty well.

[00:49:21] But like watercrafts got I mean, they're down like 30 plus percent year over year. Snowmobiles, snowmobiles obviously have a huge impact on on BRP's results. I mean, they're they're pretty much the market leader when it comes to snowmobile. So that does have an impact.

[00:49:40] I don't think I would still continue to hold if they downgraded guidance yet again, because I mean, the one thing about them is like they they are like a buyback machine. Like they're they've bought back so many shares over the last while. It's crazy.

[00:49:55] So, I mean, I imagine they would continue to do it if prices continue to go downwards just based on the cyclicality of it, which ultimately would probably benefit shareholders over the long term. I know in this last quarter, I think they generated 62 million

[00:50:11] in free cash flow and they spent like 48 million on it on share buybacks. And so shares outstanding over the last 10 years have gone from 118 million to 74 million. And I would imagine they're going to continue to aggressively buy them back now.

[00:50:27] So, I mean, maybe another downgrade in guidance, lower prices, more buybacks for an eventual rebound. I think they just have too much market share in terms of the total market to not rebound. Yeah, I mean, I think those are good points.

[00:50:41] And that's why I wanted to give you the opportunity, because I'm clearly a bit more bearish on the business than you. But yeah, like I'm showing here, they have definitely bought back shares. I guess my question or maybe it highlights the danger sometimes of buying back shares

[00:50:56] is you can be buying them at an elevated price. I can't remember, but I think the price was definitely higher in 21, 22. It was, yeah. Probably 20, 23. I don't know. Like the price is by heart. But yeah, it's something obviously it's probably if it's a company you're interested in

[00:51:15] and the best time to buy this come this these type of companies is probably when they're facing macroeconomic headwinds. So that's something for people to keep in mind. Yeah. Yeah, if you look at when it would have it would have peaked at about one hundred

[00:51:28] and twenty five dollars, I think, during covid. But I mean, if you look at the aggressive buybacks from like 2016 to 2018, it reduced its share count by, you know, what would that be? Not 20 percent, but but pretty close.

[00:51:41] And I mean, when you look at share prices in 2016, they were like thirty dollars a share compared to 85 now. So, I mean, it's it's going to be interesting what they what they do moving forward.

[00:51:51] I think they obviously think the stock is cheap, even at even at its expected guidance since trading at what if it hits seven dollars a share, it's trading at like 12 times expected earnings.

[00:52:02] So I would imagine buybacks are going to be going to be continuing on in the future. No, that's that's a good good perspective. You know, we try to be balanced. So we'll see.

[00:52:14] I mean, for me, I think it's probably the best in class for this kind of business. Just not the type of company I invested personally. But that's OK. Right. That's why it's called investing and different people have different views

[00:52:27] or different type companies that they they prefer investing in or some that they won't. And that's something that's personal. I know you had some an interesting Twitter discussion on the tweet I posted, but oh, yeah, yeah, the one.

[00:52:42] Yeah, that's one thing a lot of people like they see Bombardier and they think Bombardier, but this like BRP, they went on their own like 20 plus years. A good part of Bombardier, let's just say that. So the part that was actually good, they sold that off.

[00:52:58] Man, what's been what? Ten, fifteen years ago or two thousand three. Yeah. Twenty years. OK. So 20 years ago, pretty much. So now I think this was we'll probably wrap it up here because I know I

[00:53:10] you know, we both have some stuff to do today and it's starting to get a bit long and I am starting to get hungry and you probably need to go put some aloe on your head. So well, I'll let you let you do that to calm down.

[00:53:23] We appreciate all the support we're getting. If you haven't done so, if you can take a minute to, you know, give us a five star review, whether it's on Apple podcast, Spotify, whichever platform you listen to, it does help people. Discover us on the platform helps us grow.

[00:53:40] You can catch me at Fiat underscore iceberg on X slash Twitter and then at stock trades underscore C.A. Perfect. So, you know, we'll catch everyone next week. Yeah, thanks for listening, everybody. The Canadian Investor podcast should not be construed as investment or financial advice.

[00:54:00] 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.