The Canadian Investor - BioSteel Files for Bankruptcy and Grocery CEOs Meet with Ottawa

Episode Date: September 21, 2023

In this episode, we cover the Canadian August CPI print come in higher than expected, the founder of Indigo returning as CEO, Grocery CEOs meeting with the federal government to stabilize food prices, Biosteel filling for bankruptcy, Dollarama earnings and the recent debenture offering from Constellation software.  Symbols of stocks discussed: IDG.TO, L.TO, MRU.TO, DOL.TO, EMP-A.TO, WEED.TO, CSU.TO Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. Welcome into the show. We're so happy that you are here. Today is September 19th, 2023. My name is Brayden Dennis, as always joined by the exemplary simone belanger we have a full slate of topics and news to discuss today we got individual companies we got uh canadian macro we got some fun stuff we got

some complicated stuff we got some easy stuff everything in between on today's show do you want to kick us off with the first piece of news today um yes but first i have a question for you so someone on our joint tci i was asking what you were eating last week in the video oh um or do you even remember oh it was it was a sandwich and soup vegetable soup and a sandwich. Okay. Yeah. So every time we go to record now, because we record on Tuesdays and my calendar now, like work-wise is officially just a joke.

Like it's just overlapping meetings that never basically end. Like I block off my Thursdays for no meeting mental health Thursdays. But other than that, it's just an absolute Jenga calendar. So I'm always like, I need 10, whatever I'm eating right now, I need to wolf it down.

But that's neither here nor there. Are we back with, with Heather at Indigo? Yeah, she's back. So it's funny that I decided to look back at Indigo last Thursday or last Monday, this week, actually. It's just, you know, how we record sometimes. I forget which episode is which.

But it's funny because for those not aware, she returned as CEO of Indigo. I think it was announced yesterday. So she was the founder and former CEO of Indigo. I think it was announced yesterday. So she was the founder and former CEO of Indigo Chapter. She founded it in the 1990s, late 1990s, if I remember correctly. She had retired a year ago, but now is back after Peter resigned. And, you know, like I mentioned when we talked about it earlier this week, Indigo's not doing that great right now. I mean, I think there's still something there. I think there's definitely a brand

and there is definitely potential. So she definitely has her work cut out for her, but she's not young. You'd think at 75 years old that she would have earned her actual, you know, earned her retirement, but she must be really passionate to to be back because it's the worst retirement ever this is a tom brady retirement psych i'm back well i feel

like it must be her baby and i think she was saying thinking of joining the board at some point to just more as an oversight uh but i guess with the, they probably knocked on her door and asked her if she was willing to come back. Wait, she's 75? I just have her here on, I'm just Googling her here on Google Images. She looks fantastic. Oh, yeah. Good for her. Wow.

She does not look 70. Hey, whatever you're doing, Heather, keep it up. Did I just realize that this is heather for heather's pick like you know they say like oh yeah no i how did i never put that together so she's clearly passionate about the brand so i mean yeah we'll have to see uh you know i guess with her track record and what she's done with the business over the years um i mean my i guess this is as good as a pick as you know they could have thought of but uh kind of wrapping up that one uh compared to what we talked about last week maybe working keeps her young so she's back back to business because

uh yeah good for her canadian cpi is that did that come out this morning? When did we get that? Yeah, it came out this morning. I actually, I completely forgot about it. Then I kept getting alerts on my phone. So like, oh, um, we're recording today. So probably should talk about it a little bit. Um, so the headline CPI actually came in hotter than expected at 4%. Uh, most economists were predicting around 3.8%. So not great also kind of brings back some

memories of Twitter of a few months ago with certain officials from the federal government celebrating 2.8% inflation. That was, I think, you know, whatever you think about the liberals, you know, whatever your political views aside from that i think for me it was just like wow like you really have to be careful of celebrating this quickly i mean elections are what like a year or two depending on when they're declared and or you know i don't know the exact word in english but it would just in terms of pr it was just like wow this is a very dangerous move to take a victory lap. And now we're seeing why, especially in terms of the energy base effects.

So the one the first thing I'll start off is there was some good in these, you know, the not so bad, I would say. So food prices actually decline on a month over month according to the cpi report i don't know if i've seen that myself in grocery prices but it declines they'll take victory laps on that soon as well don't you worry because i have a follow-up on this this exact topic no exactly and i i don't know the exact believe it was 0.1 percent decline because i forgot to write it here but it was still up 6.8 percent year over year for food specifically but that is still down from the 7.8 percent July year over year and one thing that Stats Canada does quite a good job is they'll have like these graphics and this one I found pretty interesting was just how the food increase is in terms of categories,

in terms of July versus August. So certain things increase in price for food like fresh or frozen beef, coffee and tea, sugar and confectionery. However, fresh and frozen chicken decreased in price in August. Actually, not decreased in price, but there was disinflation, so less inflation. So none of these decrease in price in August. Actually not decreased in price, but there was disinflation, so less inflation. So none of these decreased in price actually. Cereal products, less inflation again for August compared to July. And same thing for fresh fruit. So there were some kind of good notes here. And before I continue on CPI, i have a little interesting story so i went to um the grocery store a couple days ago and there was literally someone trying to steal like probably

like 300 worth of beef or worth of meat that happened right next to me so you know these little are they gonna run for it well he had this little kind of rolling bag that you see people like you know they're kind of covered with a handle so he was just filling that in and i guess he must have been known by the grocery store so one of the attendants just like took him aside took the bag put it all on the uh you know the cash area and they had a few choice words for each other and then the person just left the store. So I never seen that but apparently it's quite common because I posted it on Twitter and people were like oh yeah it happens all the time. That was my very first job working at the grocery store and that was the very first piece of training was about Thrift. I remember it very clearly because

my first job you know and you're sitting down you're in like the lunchroom getting the training videos. And I'm pretty sure the entire first two hours was just about preventing theft because it's a huge, huge thing in, you know, all retail concepts, but in grocery stores, definitely. And like there's certain little tricks that people do. And I think everyone's also like accidentally stolen from the grocery store by like, you know, putting something heavy on the bottom and it goes through. Like if the retail cloak doesn't mention anything, it's not top of mind. Like that happens all the time. It's a huge source of source of losses for grocery stores. I have seen a lot of videos that are getting surfaced a lot. And maybe it's just the algo promoting them, because maybe that's what the algo likes right now. But just like, mass stealing of food and items from grocery stores, like, basically, very unsophisticated, organized crime type things. And and you know it shows that people one maybe hurting weakness in the consumer and that you know the prices have i mean look at the

year-over-year comp on a year-over-year comp that was far far elevated and you're seeing that high you know sustained in high single digits yeah i know I know. Like what I've heard, this is anecdotal. And I'm not saying they're all doing that. Just anecdotal. So take this with a grain of salt. But I've heard that some restaurant owners will actually, you know, pay people who steal meat because it's one of their most expensive products that they buy. So they'll already have a buyer when they steal, especially red meat, because it's expensive. So I don't know whether that's widespread or not, but I heard it from a couple

people in the industry that said, yeah, they know some people doing that. You know, it's kind of mixed feeling because you do think, you know, they're probably doing it for a reason because their margins are very tight or something like that but um just you know take it as you may i'm not saying that they're all restaurant owners are doing that but i've heard it uh from a couple people that you know it does happen in the industry it's such a uh the restaurant industry is such a story of tales like a few restaurants crush it and just like print money and then like the rest of the distribution curve is a lot of hardship so you know it's it's a really really hard business with a few tail outcomes that you know do phenomenally well and create you know life

changing wealth for the family but uh you know there's it's a distribution curve and it's not easy for everyone uh is that it for your segment here? Yeah. So that was more like on food. So here, well, how about this? I have a follow up here on groceries. Okay. You go for it.

Yeah. And then I'll finish this. We can loop back. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission-free,

so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Calling all DIY, do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and

growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me,

search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. So there was a bit of political theater, for lack of a better term, organizing the grocery store CEOs to get together and go to Ottawa to put their heads together or whatever kind of optics that need to be done both from the feds and from the CEOs. So it's kind of like a low hanging fruit in politics right now to go after the CEOs, these billion dollar companies, these mega rich families, and ultimately blame them for food inflation. And PM Trudeau last week said in his big speech, quote, if their plan doesn't provide real relief, we will take further action and we are not ruling anything out, including tax measures. Now, that gave me a grand chuckle, of course. And here from BNN Bloomberg, top executives from Canada, major grocery stores have agreed to work with the Canadian government on stabilizing prices.

It goes on and on and on here. And so Costco, Walmart, Empire, which is Sobeys, Metro and Loblaw executives met on Monday morning. So I guess yesterday with the finance minister and uh minister champagne champagne champagne champagne champagne yeah i didn't want to say champagne because then it would make me seem very uncultured they have agreed to support the government of canada in their efforts to stabilize food prices in canada what does that mean? You think they solved grocery inflation in one meeting? This is obviously a giant set of optics here, and I find it all quite amusing. Yeah, I think so. I mean, obviously, we try not to get too political, but sometimes the politics

intertwine with the investing world. And this is definitely one of them. I think one of the things I everyone probably have seen that is the polls are not showing, you know, the liberals very highly right now. I think there are some of the lowest rating terms of polls. I've seen multiple polls showing that. So I think they're kind of scrambling to try and tackle the issues that are dragging down the polls. And obviously, inflation is top of mind for people. And obviously, food inflation is very top of mind. We've seen housing as well.

They've announced some recent measures, including basically core CPI. Yeah, exactly. And so, you know, they've announced some recent measure. I think they'll be removing the GST for builds of rental housing in the coming, I'm not sure, the effective date. But it does sound like they're trying to show that they're doing something where people are struggling the most, including food inflation. Where I have an issue a little bit with this is grocers are just one part of the chain. you know, grocers are just one part of the chain. And without engaging to the rest, like grocers have no control over fertilizer prices, for example, which is used in agriculture. So as those fluctuate, it's going to have an impact on food prices. They don't have any impact on energy prices. Like a lot of the food we consume is transported from the US or even further down south. Right. So they don't have, you know, any control over that. The manufacturers that will, you know, make or, you know, package a lot of the foods that being sold, they have very, very little to no influence on those as well. So I think it's just, you know, I just have a hard time trying to blame one party

in particular. And even I was looking at the tweet from the food professor. He's pretty widely known, Sylvain Charlebois, who works at the Dalhousie University. He's a researcher. And he had the similar kind of thing is like you're not engaging all the actors in the supply chain to try and think that grocers on their own will be able to make an impact is kind of missing the point so maybe in those meetings they kind of realized they needed to engage more stakeholders as part of the process but that's where i had a you know to me it was just it felt PR. That's what it felt like. Oh, yeah. One million percent. And I guess I'm just looking here at Empire because I look at Loblaws a lot more than any of these names here, maybe outside of Costco. The gross margins have materially ticked up since about 2017 and earlier. So if there is some sort of something to be done,

this is the metric that I'd be watching, right? It's like how much they're actually making a take rate on gross margin for the business. And it's ticked up from low 24% to mid 26% during that timeframe. Now is that material expansion? No, but is it material expansion for a low margin retailer? Yes, it is without question. So there's a lot of players here. And pointing the blame at one is obviously impossible. But this is, this is the world we live in, right? This, this is the world of capitalism. Everyone's trying to increase their margins. You know, these are, these are publicly traded businesses, and they have a mandate to their shareholders. And they're all trying to play in this arena. And, you know, moving forward, there's going to be probably a large incentive for governments to start to try to regulate their returns. Now, I'm not saying that that's going to happen for sure.

But if you just do, you know, a temperature check, there is incentive for governments around the world, not just in Canada, to regulate the returns on the food industry just broadly with all the pressure that they're under right now. That's just my take. Whether that happens, I don't know, because it's very, very hard to actually turn into action. Yeah. And even a lot of laws, I mean, their gross profit margins have gone up, but the operating margins, they also have gone up, but not as much. Just a couple, I would say a hundred basis points, maybe a little more. And then the free cash flow margins have gone up. Those have probably gone up the most for Loblaws in terms of over the past 10 years or so. And I was kind of interested, so I looked at it too before we looked at, and Empire is the worst by

far in terms of margins. And then you have Loblaws and Metro that are pretty similar. Metro is a bit better in certain margins. Loblaws better in some other margins. But the last thing I'll say here is where I think the government has to be careful regardless, you know, whether it's a liberal, NDP, conservative, if we look at two, three, four years down the line after the election, whoever's in power, then you have to be careful with these kind of moves. Because if you're a business that's a foreign business looking to invest in Canada, you start seeing the government interfering in private businesses like that. You're probably going to think about it twice before you open operations

in Canada. And to me, you have to be careful. Granted, it's food. It's one of a necessity. But at the same time, if I'm a business owner, I'm looking to expand in Canada. I would be a little bit wary of the government trying to impose certain regulations out of the blue just for political points. Yeah. No, I'm with you. I'm with you. All right. Should we loop back here now to the rest of CPI before we talk about the drama? No, I like what you did. We were talking about food. Go to a little bit of food news here. So, go back to CPI, obviously, the headline, CPI was 4% year over year. So they're not so good. And we talked about this a couple of months ago when we were discussing the June CPI figures.

And gasoline prices rode 0.8% year over year, which was the first time since January that there was a year over year increase. It actually increased 4.6% month over month. Energy, which is a broader category, which does include gasoline, but other types of energy, was up 1.8% year over year and increased 3.7% month over month. And when I mentioned it in June, I said, okay, like right now, like July and August, we're going to see the base effects starting to shift in terms of energy and fuel prices whereas you know in June we were looking back at June 2022 and there was a big ramp up in energy prices a year before but now it's the opposite thing so you're looking at the

base effect prices were going down a year ago. And what we'll do is if prices keep going up right now or even staying steady, you'll probably see energy being a bigger factor for the upcoming months in terms of inflation and putting pressure on that. So I think it's something that was pretty easy to see. And at the time, that's why I criticized that kind of victory lap about inflation going down, because looking at just that information, it didn't take, you know, someone super sophisticated to figure out that there was definitely a big risk that inflation would pick back up. Shelter costs were up as well, pretty significantly, 6% on-to-year basis that was led by higher rents. And two out of the three core CPI measures, which strip out the volatile elements of CPI, including food and energy, were actually up. So one of them was flat and the other two were slightly up. And that's something that I can guarantee the Bank of Canada will be

keeping a close eye on as they make some decision for future rate hikes. What a different environment that we've gotten ourselves into than just 24 months ago. And it all stems with the two levers that the central banks can pull. There's two basic levers that they can pull. And when there's inflation, interest rates go with it. Now, a lot of this is very, you know, feels bad, right? Inflation feels bad. And it is, it can be, can be quite bad when it goes out of whack.

One, you know, positive thing that comes out of this, say I'm getting like 5% on my cash these days, baby. That feels nice. I've never done that. I was an investor pre-financial crisis. Not shortly after, but pre that. I mean, we've had low rates the whole time. Yeah. No, it's been quite some time. And I mean, I think even looking at, you know, the rates you can get on your cash, especially if you're looking into money markets that can get you above 5% or GICs, you're still looking at a, you know, positive real return, which means it's the difference between what

you're getting in interest and what inflation is. So we'll see in the upcoming months if that stays positive. But for now, I mean, it's still very attractive. We haven't seen them. Even when inflation was low, I mean, you got like pennies for interest. So it's not like you got much. You couldn't even match inflation back then. We have four more topics on today's show.

And one of them, stick around, people have been asking me relentlessly to cover this. Absolutely relentlessly. So when you messaged me like, dude, you have to talk about this. It's been too many times. But before that, can canopy growth do any right? That's a question that it doesn't seem, if we've been listening to this podcast, the answer probably feels like no. What now in this chapter, what once felt like the bright spot for this business, you and I talked about it. Turns out those numbers were not right and is no longer a bright spot. I don't want to steal your thunder. What happened in the last week?

Yeah, so people might have seen this. So BioSteel, they're filing for bankruptcy. So BioSteel was owned, I believe, 72% by Canopy Growth. So they had a controlling stake into that. They bought it in 2019. BioSteel was originally founded by John Salenza and Mike Camilleri. For those who are a bit older, Mike Camilleri may ring a bell because he played for, I think, the Flames, the Canadiens, and the Devils, right?

I think I may be missing one, but I think he played, he finished his career with the Devils. Devils, Habs, I remember him as a Flame. Yeah. Well, I remember I'm abs fan so as but he was quite good he was a smaller player but he scored he scored quite a bit um so they started that company back in 2009 was later purchased controlling stake by canopy now last week canopy announced that it had stopped funding BioSteel and that BioSteel had started the proceedings under the Companies Creditor Arrangement Act, CCAA, in Ontario and would be filing under Chapter 15 bankruptcy in the U.S. Chapter 15 is simply bankruptcy filing for foreign-owned entities. We saw that with Evergrande or Evergrande, whatever, the Chinese real estate developer did the same thing because they're a foreign entity. I wonder if we'll get the actual pronunciation of Evergrande or just say both.

At this point, I don't want it. Listen to your heart. We get to decide. We get to decide. So the business seemed, like Braydenden was saying to be a bright spot for canopy like we were doing the earnings every you know somewhat regularly when they came out and as early as like early 2023 uh sales for biosteel were increasing at a triple digit clip and they had announced a distribution partnership even last year with walmart and over

2200 stores and i even thought that consolation brands which is the company that owns canopy i believe they they have a majority stake in them i thought they probably had something to do with that but nonetheless yeah so a few months after that, I think it was May earlier this year, Canopy actually refiled their 2022 statements because of material misstatements and accounting errors in its biosteel unit. means it's going to be real bad. And this resulted in $10 million less in revenues for the fiscal year 2022. And we saw also how much money the unit was bleeding. And it was pretty bad. And I actually took an excerpt here of the court filing. It's pretty remarkable how much they were actually losing in terms of money. Like it's mind boggling. Like you have to really work hard. So in the court filing for the year ending March 31st, 2023,

BioSteel had 24 million, 200, like let's just say a bit more than 24 million in sales. Cost of sales, 90 million. So they had gross profit of negative 66 million, gross profit margin of negative 274%. And on top of that, they had other ordinary expenses for an additional 124 million in expenses for a whopping net loss on sales of 24 million of 191 million like you have to work really hard to do have a net loss impress impressively bad like you have to wake up every morning and just like be like today i'm gonna light money on fire that's what i'm gonna do today

i like i when i saw that and i tweeted a lot of people were like, couldn't believe it, how bad it was. But even the most recent quarter, the revenues had gone a little bit more up for BioSteel to $32 million. So definitely, you know, something pretty impressive. But the cost of goods sold were still $40 million, well above that. still $40 million well above that. And they still had a negative gross margin without counting the rest in terms of marketing spending, for example. And one of the things that was really interesting the latest quarter is that Canopy said that sales and marketing expenses increased by $12 million for BioSteel because of its NHL sponsorship. And for context, total marketing and sales expenses for Canopy was $47 million. And they said it increased by $12 million for BioSteel alone. So I don't know

how much, you know, the total expenses were in terms of marketing and sales, but you can make a case. It's probably like half of what Canopy was spending as a whole. And they also said that they were basically BioSteel was bleeding around $15 million a month. Bro, tinfoil hat grows exponentially when you have a business of this size mismanaged 10 million in sales? The sales number is 24 million. How is 10 million of it misstated? It's not like Apple that prints billions of dollars. You had a 0.0000001% accounting error This is like a material amount of their revenue. Bro, in Toronto last summer, every park you would walk into, there would be these reps that would hand you bio steels. Like they just threw them out like hotcakes, like not like little samples,

like full. Were they just throwing that as GNA in as top line? Like, I actually do wonder if like that was being thrown in as top line. I don't know. I don't know. But it's just the sheer magnitude of the marketing and sales expensive. That's what's mind boggling for them. And, you know, you can make a case when you're starting a business. Maybe there's a year or two

that you're bleeding a bit of money, especially for something like that, where you have to bring brand awareness. But this thing was founded in 2009 and it's plastered everywhere. How are you not making more money than that? That's really mind boggling. And then for Canopy- Chasing bad money after good, right? Yeah. What's the saying? Well, I know what you're saying. I don't know the exact saying, but it makes me think that probably Canopy management figure that, you know, they were being, you know, the top leadership was being lied to, to some extent.

And they probably thought, okay, they're doing well. They know what they're doing. It's not our area of expertise we'll let them run their own side business but i think that's one of the risk if you don't keep at least a decent control over it that's the kind of stuff that can happen throwing good money after bad simone i i got myself there i'm just looking at the flavors here because i got uh the images up it is tremendous how good some of the flavors are and how bad some of them are like i've tried i feel like i've tried most of them i feel like there's like five or six of the flavors some of them are

electric like so so good and some of them are, how did both of these make it out of the boardroom? Like an amazing flavor. And like, I can't have one more sip of this. It, uh, that that's what always fascinated me with these brands. Like the same team put together these flavors. Some of them are so good. And some of them are so bad. Well, BioSteel. Yeah, I mean, not much more to add. I guess the NHL is going to have to find a new sponsor. I think it's that. And apparently they're going to be terminating all the contracts they have with NHL stars, which makes you think if, you know,

if you're a professional sports player, maybe double check the finances of the companies you sign sponsorship with to make sure they can actually afford it. But that's probably a discussion with their agent. Yeah, I'd say so. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you

can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable

and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Calling all DIY, do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights,

track your dividends, and there's other stuff like learning Duolingo-style education lessons that are completely free. You can search up Blossom Social in the App Store and join the community today. I'm on there. I encourage you, go on there and follow me.

Search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. All right, these debentures. God, I hate that word.

Sounds so buzzwordy. And that's because it is. And we're going to get real buzzwordy here. And I'm going to try to explain it as simple as the way I know how to explain it, because that's the only way I know how to explain this stuff. So I've been getting tons and tons of questions, piles of listener questions here on joint TCI dot comcom our patreon and also just online about these debenture rights and warranties that constellation shop software holders have seen show up in their brokerage account so a debenture is simply a debt instrument a bond like instrument but without collateral and in this case the company's raising $700 million Canadian

dollars in addition to the debentures that they've had on their balance sheet for a long time, which is just a form of long-term debt that exists on their balance sheet. I think there's like a 40-year term on it, goes out to like 20 or goes out to 2040. Anyways, the debentures are inflation linked. So the current listed yield plus the CPI print, you're looking at a 13.3% yield, but they reset every year. So it's not locking in at 13.3% to 2040. They are inflation linked. So it's the sticker price of what they're going to pay plus the inflation link. And so they're nominally worth $100 each in terms of the debenture. And you can purchase them with the rights to purchase them that have been issued to shareholders. So they can be purchased though, however, for a premium of $138 a share. So there's a premium being put onto them when they start trading. And this is a floating number. I think it was as low as 136. It's gone up to 138 on the premium. So there's

demand for the debentures clearly because they're trading above par. So you're going to see two things in your brokerage here, the warrants and the rights. And if you're not a consolation software holder, no problem. But there's something here to learn because this is the first time I had ever experienced this. So I had to learn myself too. And that's this whole game. This whole game of investing is you figure stuff out as you go. So the warrants are one for one, which means if you previously had the debentures, you can swap them for the series one, which is the same, except they don't have the redemption clause. So you can swap the warrants one for one, if you'd like. You got one for each share. If you don't have the debentures

previously in the previous series, then the warrants are meaningless until they get listed. And then you can sell them for a few, a few puckeroos. You know, you could probably get like a junior chicken from McDonald's for the price of these things, unless you have like a, you know, a couple hundred million in CSU stock. The rights are on a 3.03 ratio, just to complicate things. So every 3.03, you got a right. And these have a value of about like 30 cents each day, and you can sell them if you'd want. So this 13 and a half, roughly current yield with the inflation link is quite attractive. No doubt in terms of a fixed income investment here. But of course, I think you have to have a take on inflation from here because it's such an important part of the yield that you're going to get. And if we go to a

more normal inflation rate, historically, this yield resets and it's not nearly as attractive. Now, it could stay elevated for a long time. It could be an awesome instrument to own. I do obviously expect CSU to redeem or else why the heck would they go through this absurd complexity, right? Like I've seen some comments online, like what if they don't redeem? And it's like, they will. Like, you know, like it's not 100% sure, but why would they go through this absurd complexity in corporate finance to get this if they don't redeem? So all of this being said, what am I doing personally in my account?

I'm not interested in the debentures. I want to own the equity. I want to own just the equity and the spinoff equity. So I will not be using the rights and I don't have any previous shares of debentures. So the warrants, there's nothing for me to do and there's nothing to trade right now. So I'm treating it like a very small special dividend and selling the rights and selling the warrants when I can in the future. Look, I know a lot of people have been very confused because there's two new items sitting in their brokerage that they've never experienced before. I get it. But it's not a huge deal unless you're very interested in using your rights

to buy this fixed income instrument, do your research because they are fairly complex. I've seen people do some crazy trades with the spread on the rights as well. This is pretty cool asymmetric risk there, asymmetric bet there. It's risky. If people are trading the rights,

this is a fairly risky asset uh to be trading so just be uh do your research and be careful there yeah nothing uh nothing to add i'm a little confused still but that's don't worry so am i yeah okay i was just like don't get it twisted you know this is like clear as mud if you read the prospectus that that you got in the mail you'd leave more confused okay that's good unless you have like you know eight cfas this is this is very complex corporate finance and and and uh and and it's it's complex because it's also linked to the first series of debentures as well. Okay. No, that's fair.

That's, I mean, thanks for the explanation. The takeaway here is if you have them in your account and you don't know what to do, don't stress. You know, like, don't worry about it. That's a good takeaway. Well, now we'll move on to stuff that's a little less complicated, at least from my perspective. So, Dollarama earnings. Long story short here was really a great quarter for Dollarama. They just keep thriving in the current environment that we're seeing with people, unfortunately, having less disposable income and clearly turning to Dollarama.

And I was definitely I've said it a couple of times, but I'm more than happy to say, you know, when I was wrong, when I'm wrong. And I was definitely wrong about this one. You were right, because I thought that when inflation started to get higher, I thought it would are higher, well, as long as you're still a better value in the eyes of consumer than your competitors, I mean, consumers will go there. And I think that's what we've seen. Anything you want to add before I get into the numbers? No, I just like being right. That's awesome. Yeah. Okay. Okay. It's okay. I know you're wrong sometimes too. I'm wrong all the time. I probably just said something wrong on my last segment.

With Dollarama here, right? Like that's the key here, right? Is I've been banging the drum on pricing power far beyond what you would expect surface level for a dollar store retailer, for a very price sensitive consumer. Yeah. Turns out, it turns out if you have the best value proposition, if you're selling things for half of what other stores are listing them for, and you have your supply chain solid, and you're one of the only games in towns in terms of dollar stores compared to the US where there's tons of competition, pretty good business, actually really, really good

business. Yeah. And I think where they really do well i was really reading an article is they tend to be really good at offering value but on smaller volume than grocers or even a costco right that's kind of grocer but other things uh where they will have i think i mean i'm joking but you, they'll have like just one roll of toilet paper. And it'll be, maybe they do, I don't know. But that's an example where if you go to a supermarket or you go to Costco, I mean, Costco you have,

if you're single, you have enough for two years worth of toilet paper. And it'll be cheaper by unit, but you need to be able to afford to buy that 20 something, $25 package and be able to get to Costco, which, you know, some people just can't afford to. If you leave with one toilet paper roll, I have questions. I have an abundance of questions for you. I have an abundance of questions for you. But, you know, that's and that's what they were showing is it's not always cheaper at Dollarama. But the smaller packaging is cheaper than most comparable in those smaller packages from other retailers or especially typically grocery stores. But I thought that was interesting. So sales were up 19.6% year over year, which obviously is tremendous.

It's above inflation. Same store sales were up 15.5%. Gross margins were down 160 basis point, but operating margins were up 400 basis points. So I mean, to me, that's really good, especially operating margin. It's closer to the bottom line. So at the end of the day, that's one of, I personally put more importance on the operating margin, but it really depends on the type of business. But with inflationary costs, I've been putting more and more importance on that. Earnings per share increased 30% to 86 cents. Free cash flow increased 369% to $366 million. They repurchased $240 million worth of shares during the quarter. They opened 18 new stores.

And an interesting stat they mentioned was that they had 13% more transaction and that the transaction size increased by more than 2.3%. So the 13% is really interesting because it just shows there's more traffic, more people going there. The transaction size that I was surprised it was only 2.3%. But I thought that was interesting. And little fun fact, did you know that Dollarama has operations in Latin America? I don't think I did know that yeah so i did not either so they own 50.1 percent of dollar city which is headquartered in panama they have 458 stores in total which is broken down and the following countries 272 in colombia 93 in guatemala 66 in El Salvador, and 27 in Peru. So I always thought it was purely a Canadian play, but I guess I learned something.

I was kind of doing a bit more digging, and I was looking for their store count. So you know how a lot of these earnings, sometimes you'll control F to find what you're looking for rapidly. And then I saw that, so it's something I wasn't aware of. what you're looking for rapidly um and then i saw that so it's something i wasn't aware of yeah that is i mean and probably an important kind of story looking long term right it's like what can this it's very hard to do but can dollarama look for a place to replicate the model right like because the u.s i think is the u.s is a non-starter like there's there's so many players large large publicly listed dollar store like huge companies yeah dollar tree you've got general yeah five below all of those are you know double digit billion market cap public companies but like outside of that,

is there anywhere that they can kind of replicate? So this is an interesting kind of story to follow. I truthfully didn't know that. So that's, that's cool. All right, let's go to Adobe here. Adobe reported their third quarter late last week. Nice little quarter from the company here. It's been a bit of a roller coaster. It's been a low key roller coaster of a stock for shareholders over the last 24 months. And we've talked about it kind of, you know, on and off when it's been in the news, and it's been in the news a handful of times here, from extreme optimism, beautiful growth and margins, you know, during the 2020 2021, early 22, to worry about competition, worry about AI, huge multiple paid on this $20 billion acquisition for Figma, which was arguably their largest kind of threat in terms of a cloud

first collaboration tool for the design industry, especially designing websites, graphic design, that kind of stuff. And I don't have a high confidence that that is going to close, by the way, that acquisition. It's looking like a bit of a blunder. There's a lot of scrutiny from regulators. The UE has probed into it. They have December to provide an answer to the company right now. It doesn't look particularly great in terms of Bureau of Competition passing through that.

So after a little bit of a rocky rip there, tough comps, a lot of pessimism, the stock has almost doubled in the last 12 months. And around this time last year, we talked about the company and it was very unloved. And I said, hey, if you want to be an Adobe shareholder, now's your chance, friends. Like, look no further. And, you know, in hindsight, that was a good call because revenue grew 10% year over year and earnings per share grew up 27% year over year. The pretty strong performance from the document cloud in terms of annual recurring revenue in the creative cloud,

annual recurring revenue, the run rate is about $12 billion in sales of annual recurring revenue for the creative cloud. Now, looking forward, the creative cloud, the biggest part of the business, only growing single digits, while still impressive off tough comps and for how kind of legacy in terms of software this business really is. I think that it's going to be pretty tough sledding, very profitable, you know, mid single digits growth on the top line, maybe low double digits growth on earnings per share, buying back lots of stock. This is going to be a very mature software company moving forward from my view, because they have a landscape of really tough competition. And when it comes to generative AI, the barrier to entry for

creating this stuff is going to change massively over the next five to 10 years. We've already seen how good it is at creating images and creating text and performing tasks. When is video coming? And these are all things that Photoshop and their programs, they're putting that all in there. And they say they have better data points than everyone. I just worry that that becomes a little bit more commoditized. And these browser-first collaborative tools like Canva, like Figma, if they don't end up buying it, Canva, like Figma, if they don't end up buying it, pose a kind of a real existential threat to some of their legacy creative cloud businesses. There's been lots of changes in the document cloud. That's become pretty commoditized. Now, how many DocuSign competitors can there possibly be?

And I think that they do still run on the rails of PDF technology, but it's really not that deeply rooted. It seems like it's been around forever and things can't change. It's technology. The only thing that does happen is change. So if the company can keep being extremely, extremely profitable, grow a little bit over time, buy back lots of stock. That all sounds good. The problem is, it's not a cheap stock. It really is not a cheap stock after the run-up that it's had. I liked the valuation 12 months ago, but it's really hard to justify market beating returns IRR wise here. Personally, from my analysis of Adobe, I of course, the future is yet to be seen. But that that's how I'm looking at Adobe here. No, I mean, you know, the name better than I do.

So I don't have too much to add here. I think I agree with you, there could be a lot of disruption, especially with AI coming up. So, you know, just to keep in mind, maybe there's something we're not seeing, but I'm not really interested in the company. I think that's pretty obvious. Um, so that's my two cents there, but I think, uh, I think that's good for, to, for this episode, cause we're already running a bit long. So I've been meaning there's a last segment, but, uh, I'll, I'll bring it in a week or two. It's fine. It's less notes for the next time. That's right. Lots of news from us in terms of the show coming up in the next few weeks, I'd say. We're making some final decisions

and plans forward for my replacement for the Thursday releases episodes. This news style episode, I'm not going anywhere. I'm going to be around on the Monday shows. But Simone, we'll have a new co-host soon. And we'll have more and more news. We're just not rushing into any decisions.

We're taking it slow. This is our baby. We love doing it. We've done it for a long time now. And we love our listeners. So we'll have some news. So keep tuning into the episodes. We'll have some news for you soon. In the meantime, you can check out join tci.com. It is our Patreon page where you can support the show. You obviously support the show,

but you also get our monthly portfolio updates every single month. And, uh, this, this show here on video as well. And Simone's income portfolio, which is super helpful for people looking at retirement, in retirement, planning for retirement. You know, it's all good stuff. Yeah, and I tend to go twice, a couple of times a week. I'll go make sure if people have questions,

I'll get back to them. So I have it on my schedule to just go check once in a while. Yeah. And don't forget, if you've been looking to subscribe to stratosphere.io, you can use code TCI for 15% off. That is code TCI on stratosphere.io on a paid plan for 15% off your first year. Give you a nice little discount.

See you in a few days. Take care. Bye-bye. The Canadian Investor Podcast should not be taken as investment or financial advice. Give you a nice little discount. See you in a few days. Take care. Bye-bye.