The Canadian Investor - Canadian Inflation Drops Below 3% and Tech Mergers

Episode Date: July 20, 2023

We are back with our regular Thursday episode where we talk about news and earnings in the investing world. We start off by talking macro with the Canada June CPI print and Bank of Canada rate increase. We then give an update on the Microsoft/Activision-Blizzard deal and Constellation Software’s acquisition of Optimal Blue. We finish the episode by talking about the most recent quarter from Aritzia.    Symbols of stocks discussed: ATZ.TO, MSFT, ATVI 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  Interested in becoming the next co-host of the Canadian Investor Podcast? Send us a 1 minute video at [e-mail] . Youtube video on the Rise and Fall of Activision Blizzard 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. My name is Brayden Dennis, as always joined by the tenacious Simon Belanger. Good, sir. I am a little under the weather and I let you know about that, but I feel a lot better today.

It just sounds like three or four packs of darts were smoked before this recording, but the show goes on, as you know. How are you doing, buddy? I'm good. So what are you saying? You only smoked one? One pack? No, three packs. Three packs.

Yeah. I'm doing well. Yeah, it's good to be back and it's we've only done one pack so that's good yeah uh we've been when's the last time we recorded like a couple weeks ago i think right yeah because yeah so we did the you did the episode with dan yeah right after the meetup and then we had a little rewind, which people seem seeming to like. But yeah, so it's been it's been a bit. It's good to be back. Yeah, exactly. And then Dan's been texting me.

He's like, oh, we need to do another episode, like another collaboration, because the feedback has been really good. And I do encourage people to listen to both parts. It's just we did a lot of research for that so it was a fun episode and happy to hear the positive feedback i know i listened to it on the plane i just got back from halifax two weekends ago and it was awesome like i really enjoyed the episode as like a fan of the show. It's so nice because I don't listen to the show because who wants to listen to their own podcast?

Absolute cringe mode. So it was really nice to listen to the show with you and Dan. You guys were just spitting facts, spitting knowledge and kind of a refreshing perspective both on the positive and the risks of the asset class that a pretty balanced take both on the opportunity and the risks from here moving forward. Because when you have such an unloved asset class, like office, and then it being bucketed into just commercial real estate. Oh, yeah. Just this like gigantic, like, you know, trillion dollar asset class, which, you know, it's too big of a bucket. So it's nice hearing Refresh and Takes because when it's such an

unloved asset class, you don't hear money, good, positive news stories about the asset class. So I liked it. Yeah, no, thanks a lot. And now I guess we'll get started. The first thing we'll talk about is just the big macro that came out. So we're recording on Wednesday. So just a day before, just because of our schedule, they're a bit different this week. Typically, we'll do that on Tuesday. But we had the June 2023 CPI increase that came out. So the CPI print for Canada. And obviously, a lot of people are watching that, especially following the Bank of Canada increase that happened a couple weeks ago.

And it was definitely better than expected in terms of the headline numbers. So 2.8% year over year, which is actually the first time that it's within the Bank of Canada target of 1% to 3%. So people tend to refer to the target as 2%, but it's actually more of a bracket that they have. So it's the first time that they reached that target since March of 2021. So more than two years, which is pretty crazy. I think we've just been expected, been accustomed to higher inflation prints ever since. Yeah, that's right. You see a number in the 0.1% on food and I guess it's working what they're doing. Yeah, I mean just-

At what cost, but. Exactly. So I think there's some definitely some, there's some good signs, but I think it's important to just look at more than the headline numbers. So like you mentioned, food rose 0.1% month over month, but 8.3% year over year and shelter rose 4.8% year over year and 0.5% month over month. So still pretty significant month over month here. And I wanted to single those two out because obviously they affect everyone, but also much more the lower income households where it's a bigger percentage of their consumption. So I think it's really important to remember that. But like the previous print, there was downward pressure on the CPI headline

number year over year because of energy costs, which have dramatically gone down year over year. So that's really based more on the base effects that we've talked about. Energy as a whole was down 14.6% while gas was down 21.6% and transportation, which is also very sensitive to energy prices, was down 3.4%. And I think that one is really important to know the base effects because it will start leveling off starting in July, and even more so in August, September and into the fall. So essentially, what this means is that energy and gas won't be pulling down as much the CPI print as it did in recent months. So there's really a good case to be made that it's going to take back up. I don't think it's going to be necessarily, you know, the 7, 8, 9%, but it's probably going to be more in

the 3 to 4% range, probably for the foreseeable future. Like I said, probably, I don't know. I'm not making any predictions here, but it's just using logic and looking at those base effects. And the last thing here is services remain sticky with an increase of 4.2% year over year. And the three core CPI measures, those are simply the ones that the Bank of Canada keeps a closer eye on because they strip out food and energy prices, which are very volatile. They remained elevated, although down slightly. They were 5.1%, 3.9% and 3.7%. So clearly still above the Bank of Canada target here.

No, it's a good overview. I guess we can just hop right into, you know, the other lever that they pull. Yeah, it's a good overview. I guess we can just hop right into the other lever that they pull. Yeah, exactly. And this one is interesting. So if anyone interested in macro, especially the Bank of Canada increase, I listened to the Canadian real estate investor and Dan and Nick did a really good overview of this. They looked at it as a, you know, the broader impact, but also obviously more lenses on Canadian real estate. And I encourage anyone to go back to their episode that was released yesterday or Tuesday this week. They do a really kind of more deep dive into this. And the Bank of Canada, I think everyone probably knows at this point they raised by 25 basis points to 5%. And that's the highest in 22 years.

And the move was based on persistent price pressures and robust consumption growth. So Tiff McLean mentioned that they are trying to balance not doing enough rate hikes and doing too many. So the four more does mean that inflation would stay high, while the latter would create a hard landing. A hard landing means a pretty significant kind of pullback in the economy. So a pretty harsh recession would be a hard landing. And the bank is prepared to increase rates further if necessary, although future decisions remain data dependent. And they do acknowledge that the economy remains in excess demand, especially services, and it has consistent and robust demand. But they also mentioned that the housing market has seen a pickup in activity, which is funny because they seem to be eyeing a

bit more the housing market now and a bit less the labor shortages that I've actually been putting kind of easing the labor shortage has been the increased immigration but at the same time they also mentioned that the increased immigration and rapid immigration is actually increasing consumer spending for certain types of category and increasing the demand for housing so it's kind of this good and bad at the same time. And one of the things is they're very aware that some are being squeezed by those higher rates and inflation. They mentioned that several times in their press conference. And I don't know if you saw this, it made headline, but it's not part of the Bank of Canada increase. But I thought it was interesting with this last comment is that a report by insolvency firm MNP Limited came out last week saying that 52% of Canadians are $200 away or less

from not being able to pay all of their bills at the end of the month. When you hear those stats with like actual nominal dollar amounts, it's insane. that 52% of Canadians are $200 away or less from not being able to pay their bills at the end of the month is unbelievably scary. And what that means is just incurring more and more credit card debt for a lot of people. That is the reality. Yeah, exactly. Definitely for me, it's mixed emotions here where on the one hand, I definitely feel fortunate in the situation I'm in. We're in a good financial position. Clearly, we're not able to be saving as much right now for a combination of my wife's on mat leave and also I'm feeling inflation just like everyone else, but we still are able to put money aside. And we're, you know, we have a big buffer. There's no issues with that. So I think on the one hand, I'm I feel very fortunate. But on the other hand, I also feel for people that are in that situation. And if you know people in this situation, or someone approaches you, or if you are in that kind of situation um you know make sure

you talk to your friends and family if you're really in a tight spot because going to like payday lenders and stuff like that um you're most likely your chances of getting out of this vicious cycle um go dramatically lower because the interest rates on those are just, um, they're just insane. If that's just my opinion, but you know, they go upwards of 30 and sometimes even 40%. Yeah. That's like putting yourself into a hole where it's not just you've now put yourself in a hole. There's also people digging while you're trying to get out because the interest is so high that you're right. It's this vicious cycle. That's a good call.

Dude, those services can really get people. And they're not designed for people like you and me and many listeners of this podcast. listeners of this podcast. They're designed for people who are in situations that have no other choice or feel like they have no other choice. So steer clear when possible. Yeah. Yeah. And to go back to the Bank of Canada increase and also what Dan and Nick talked about, so they actually pulled another report that goes more into depth about the financial, let's say, situation of Canadians in general. So if you're interested in hearing that, again, go to that podcast. Very good listen. And the last couple points here is they also mentioned that, you know, they have to be very cognizant of the base effects when it comes to CPI and rate hikes because they realize that energy has had a big pull-down effect like I just mentioned and that core

inflation remains higher than they would like, like I mentioned in my previous segment as well. And they continue to expect inflation to moderate, but it's going to take longer than expected. Inflation is expected to remain around 3% over the next year before declining to 2% target in mid 2025. And for that, I'll just say, if you're looking to make a big purchase that requires a loan, whether it's a house, whether it's a car, anything like that, and you're using the Bank of Canada's predictions for inflation, take those with a grain of salt because I don't think I need to rehash it how, you know, wrong they have been over the last few years.

And I would probably have been wrong if I made some predictions just like they did. But I do wonder why they even try at this point. It just makes me wonder a little bit why they even try. But, you know, if you if you're looking to make a big purchase, I would say just make sure you plan for the worst. And then if the worst case doesn't happen, then at least you're good and you've planned for that and that excess money that you don't need, you can use it elsewhere. You're right. Like, why even make those projections? Because they're smart enough.

They're economists. They're smart enough to know that they're going to be wrong or that there's a huge margin for error. And the fact that it's coming from them to a regular Canadian holds a lot of weight. Who else are you going to take that kind of prediction from with so much weight other than them? And so that's when it becomes a little confusing for guys like us, because we know that there's going to be a huge range of outcomes. They know there's going to be a huge range of outcomes. They know there's going to be a huge range of outcomes, but for the regular Canadian who might tune in and catch wind of that, how are they supposed to not take that seriously? It's a confusing

thing that they do. Yeah. There's just no upside to me. No upside. Yeah, yeah exactly if they're right okay cool you guys were right that's good and if they're wrong that was your job yeah yeah and if they're wrong then you know what's gonna happen every single politician regardless of the party is gonna be tweeting with a different angle but blaming the bank of canada in one way of another um so i don't know it's just i feel like it's a lose-lose situation for them when they do that yeah it is a lose-lose and that job already feels like a lose-lose so don't be you know don't be giving yourself more that's just that's just not very smart all right. Let's do a little recap here of,

was that two weeks ago now? Yeah. I'm at a time where- Yeah, almost two weeks. Yeah, like 12 days. This is classic summer. You're like, oh man, it's already moving along into August here. I know we're recording this on July 19th, but that is the summer in a nutshell. 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. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away.

Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. All right. So we met up with the listeners of our pod in person in Toronto, and I wanted to do a little kind of recap because it was nice. It was really nice meeting a lot of people in person. And I had some kind of takeaways of what we've built here. First of all, is we've built an awesome community of people,

a very diverse crowd, all walks of life, who all share a common interest and a common hobby of aggressively binging this podcast. And we love you and we appreciate you for that. I was amazed to see 100,

roughly 120 of you in person. i think so yeah every race every type of upbringing new canadians uh people who have were born here people who just moved here introverts extroverts, women, men, young, middle-aged, retirees, everything in between in that 120-person sample size. It felt like one of those cross-sections of the world. And that just shows you what Canada really looks like. And it solidified a thought that I've always had, which is the stock market and quote unquote capitalism is always thought of as a right-leaning mechanism that's only for the elite. And when it is actually the most perfectly apolitical wealth building machine that doesn't care who you are, where you're from, what your upbringing, if you're from a rich family, from a poor family, every single person has, it's given them the ability to democratize the ability for everyone to use it as a tool to gain freedom or wealth.

It doesn't matter which way you lean. And the reality is the market doesn't care either. It doesn't care about any of those things. those things. And the real trait that it rewards is nothing to do with any of those personality traits or where you're from. The only thing that it rewards is patience. And that's why I love it so much. And so I want to say thank you to the people who came out. Thank you for everyone who couldn't come out, who, you know, listen in from, you know, the East Coast, the West Coast, the prairies up north, everywhere in between. We appreciate you. So, hey, we appreciate the people back there. Yeah, no, it was great. Yeah, just to reinforce what you were saying, but I'll let you finish and then I'll add, I thought you were done with that.

It's also really cool. I have three more points here. It's cool to see how many people who have listened to every single episode. One, people who have been listening since the very start in early 2020 and the end of 2019 when we started the show. And a bit of a strange phenomenon, how much you guys know about us. So when we meet you, it's a strange relationship at first, but learning about you guys for the first time

and the absolute studly group of guys and gals who listen to the show, it's nice to kind of flip the switch and learn a bit about you. One more point. I will order more food next time. We had a hungry bunch of 120 people. I ordered for 105. I think some more people came. But even if it was for 105,

it was wiped clean. I didn't have much food. I'll say that. I think I had two small things. I think I had a chicken tender and that was it. We had lots of leftover drinks, but no leftover food. So we'll have to adjust next time and my last point is we'll hopefully do it annually and hopefully in various Canadian cities where possible as well major Canadian cities that we can bring in

a big group from different provinces so we will do our best to kind of make our way east and west from here. So thank you, everyone who came. And thank you for who couldn't come but support the show regardless. Yeah, it was amazing. And like you just said, just reinforce that it was great to talk to people.

Name tags were a really good call. And thank you to your lovely girlfriend who went and uh and got some last minute because i'm not good with names and i yeah i forget names very easily so that definitely helped out and i had some you know i i chatted with uh probably most of the people i would say at some point at least just said hi to pretty much everyone and And it was just nice. Some of the questions I had from people were really interesting. And I definitely will use a couple of podcasts in the next couple of weeks

to talk about the questions I had because they were really good. And some of them I just said, oh, that's a really good question. I need to think about it a bit more. So I'll make sure that I talk to you about those on the podcast. But yeah, thank you everyone

for coming everyone was great uh great evening and uh definitely my voice was a little shot after that but uh was still really fun you sounded like me today yeah pretty much yeah um dude so let's let's move on to this microsoft activisionision Blizzard deal because this is now getting spicy. And my follow-up segment is part of this greater theme around working with regulators to make acquisitions happen and doing things to make them happy and to feel really not like non monopolistic so uh let's let's do microsoft activision blizzard here first yeah so this came out just this morning so literally i saw the news so i scrambled before we started recording we're recording at 10 a.m um so basically microsoft and activ Activision Blizzard agreed to extend the deadline for the acquisition of Activision Blizzard by Microsoft.

And the original deadline was earlier this week on July 18th. But there had been some regulatory pushback from both. Well, specifically the UK and US regulators have really been pushing back on the merger. And if the deadline had not been pushed, Microsoft would have had to pay a $3 billion breakup fee to Activision Blizzard. And I did see a lot of people commenting that I think shareholders of Activision Blizzard were almost hoping some that the deal would not go through so they could get that big breakup fee.

But nonetheless, Activision must see some value still in the deal would not go through so they could get that big breakup fee. But nonetheless, Activision must see some value still in the deal because they agreed to extend the deadline to October 18th of this year. But the breakup fee will actually increase to $3.5 billion if the deal is not closed by August 29, 2023. And if the deal does not close by September 15, the breakup fee will increase for to 4.5 billion and it is payable if the deal fails to close and it's subject to no other conditions so definitely something that makes sense at least from an activision blizzard if you know from their

standpoint they probably said okay if you want to really close this deal, you have to make it worth a while and give us some more assurances. And I think that's what they baked in here. And Microsoft said in a statement that the extension will allow for additional time to resolve remain regulatory concerns. And the two biggest concerns are, like I mentioned, the UK and the US. In the US, it's currently in court, although a judge issued a ruling denying the Federal Trade Commission a permanent injunction last week, which the FTC, the Federal Trade Commission, is currently appealing. And the Competition Markets Authority, so the CMA in the UK, has extended its deadline to review the deal from July 18 to August 29. So it kind of aligns with that breakup fee that's

set to increase at $3.5 billion. So it's the same date. So it's interesting to see what's happening here. And I know a lot of people, and I think you'll probably talk about that, but essentially a lot of people were saying that Microsoft would essentially like make the games exclusive to the Xbox or even PC which they have really market dominance there in terms of games and I think part of it is that they agreed like a 10-year agreement with Sony to have it available on their platform that's part of of that. But also, I don't know about you, but it doesn't make much sense for them limiting to other platforms because I'm pretty sure that the Xbox, the actual console itself, is not the most profitable when they sell their units. They really make money when the games are sold. So you might as well, you know, get some additional units of

games sold on other platforms. To me, that's logic. I don't know about you. Well, it would certainly be cannibalizing the Activision Blizzard part of the business by doing that. And that's the whole sticking point on regulators is saying someone like a Microsoft could take this, what, like $80 billion asset, cannibalize it for the benefit of the ecosystem of the console, you know, of Xbox. And so Phil Spencer, who runs Xbox, he's the most senior executive on the Xbox team. We are pleased to announce that Microsoft and PlayStation have signed a binding agreement to keep Call of Duty on PlayStation following the acquisition of Activision Blizzard.

We look forward to a future where players globally have more choice to play their favorite games. So this is what happens when a deal like this has gone on and sits in no man's land, you have to start showing regulators that we're willing to do things to make this deal happen, one. And two, look, we're not being anti-competitive. Look here ftc so this is this is not surprising because this is a big sticking point especially when the largest franchise in for activision blizzard is call of duty it's it's it is the flagship uh series uh flagship game for the activision blizzard asset yeah yeah and they have other good assets like i I know I like, I've always, when I was younger, I played Diablo 2, which is widely

considered at one of their best kind of games in terms of that genre. And I mean, I think there's also World of Warcraft, Starcraft that are really good, you know, pieces of intellectual properties. And one thing I- And there's King, which is the mobile game company, you know, Candy Crush is the big asset there. Yeah, and I encourage people who want to just get to know a bit more like Blizzard and how they've evolved over time.

I would encourage, I came across this video from literally this kid. I think this kid is like 20, 21, but really good. So it's called The Rise and Fall of Blizzard Entertainment. And I can put it in the show notes. Essentially, it goes through the very beginnings and towards like essentially the offer from Microsoft to purchase the company and what happened and how the talent within the company. There was a bit of an exodus of talent they went away from their roots in terms of really having polished games when they came out

whereas a lot of the games that came in in recent years were very buggy and that is not very popular for their cohorts to have a buggy game and then you kind of fix it as you go. So I encourage anyone who's more into gaming and wants to get a bit more of a background behind that company. I'll put in the show notes. Feel free to have a look. Speaking of regulators and trying to get a blockbuster merger acquisition done, merger acquisition done. Black Knight and ICE. So ICE is the operator of the New York Stock Exchange for those who are unfamiliar with the business. Gigantic, obviously runs the NICE, but also big analytics business as well on equities, credit, everything in between, mortgages, everything in between. So they have been trying to do a merger with a company called Black Knight, which is a leader in the mortgage and lending analytics business. Gigantic business. I think it's around like 13, 14 billion in market cap. Now, where I'm going with this is the news is that Constellation

Software, the serial acquirer out of Toronto, CSU.TO on the TSX, has acquired Optimal Blue, Blue, which is a software business of Black Knights. So to make this deal happen, just like we were talking before, Black Knight and ICE have agreed to carve out Optimal Blue from the business to make it less anti-competitive. And they were looking for a buyer. to make it less anti-competitive. And they were looking for a buyer. Constellation Software has entered a binding agreement to buy Optimal Blue, the software business inside of Black Knight. So carving it out for $700 million. It is 200 million in cash and a $500 million 40-year promissory note issued to Black Knight. So this is like an unbelievably long promissory note and a heck of a deal for Constellation because no payments and no interest is incurred for the first five years of this 40-year promissory note. Now, Optimal Blue was purchased in 2020 for 1.8 billion in enterprise value and does around million in revenue and is a growing asset, very profitable. And Constellation just robbed them

of that asset for more than half, sorry, I guess less than half of what it was purchased for just two and a half years ago. And this is an example of a very opportunistic capital deployment where both companies would love to own Optimal Blue, but making this merger and acquisition happen is more important than the asset for these two gigantic large cap companies. So CSU does it again. They pull a rabbit out of a hat with this deal, paying around three times sales for a growing profitable software company and around seven times EBITDA for the deal. So very, very interesting. Now we're close to 2 billion and trailing 12 months of deployment of capital for acquisitions here from Constellation Software. So just when you think they can't deploy enough capital, can't pull off big deals, they've now done two huge

carve-outs of public companies in the last six to eight months. So they've done it again. Yeah, I might just have to buy a share and rely on you for this one. I don't have the brainpower to learn another business in and out. But no, it's interesting. I do wonder if they were able to get especially better deal because I have to assume that Optimal Blues business has not been growing as quickly as it probably was in 2021 and early 2022 when you know mortgage originations were going through the roof right so I think this this kind of reminds me of Brookfield buying Interpipeline when the market was kind of down on it. It was clearly still very profitable, still a good business, but the market's just down on that kind of stuff.

Am I seeing that correctly? It's a bit of that, surely no doubt, where maybe internally they're willing to let it go. Maybe there's some softness in originations, but it's a highly recurring revenue software business. So even if the originations are down, it's a SaaS business with really, really low churn. So maybe some of that, maybe on like the growth moving forward,

but the main driver is them trying to increase the probability of them being allowed to do the deal. Um, and so that's, that's the main, the main driver for our, um, because it says here, it has been a sticking point. It says here in this, so I think this is from RBC. They increased their price target on Constellation to 3,200. Optimal Blue has been a sticking point in the FTC's case to block the proposed merger of ICE and Black Knight, with Black Knight now divesting both Empower and Optimal Blue to Constellation because Constellation already bought Empower part of this deal. So now this is the second divester to make the deal

happen. And they're both going to the same company probably because they're just like, we already know you'll buy Empower. Do you want this one too? It's a little bigger. We need to make this merger happen. And so you just got to love seeing this kind of stuff because you want this in a capital allocator. People who are very opportunistic. And this is opportunistic as it gets when it comes to a sticking point with the FTC. So it's a beautiful thing. Yeah, it's interesting. I was reading somewhere else and sorry, I don't remember where, so I'm just going to go based on memory here. But it seems like Lina Khan, which is the chair

of the FTC, seems like she's got a mandate to go after big tech or anything related to the tech space and making sure that there's not too they don't get too big because there's been a lot of court filings from the ftc and bringing various mergers or trying to blog them i don't know if it's more than the previous chair but it just seems like i mean just from my perspective it seems like there's a lot more happening yeah it it certainly seems like it and there's also just been so many big uh blockbuster type ones like the like the microsoft division blizzard that are that are front and center that that get a lot of coverage so. So deals that might have had a lot of contingency before, they're not going to get the same type of coverage as a $2 trillion company

buying an $80 billion company. These are Goliaths. Yeah. No, exactly. No, a good point. 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. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot

of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Well, I guess now we'll move on and just finish on a company that I know we have some listeners that own this stock. We've talked about it before. Earnings came out, I think it was last week. So I'm talking about Aritzia here, a Canadian company. If you're not familiar with them, they do women's clothing. They released Q1 2024. And if you've been following the stock, you

probably saw that was not a great day and I'm not trying to laugh for those who own this stock but it was down a whopping 25% because it wasn't a great earnings release and I'll go over and obviously Brayden feel free to chime in if you want to add some things here now what happened well net revenue increased 13.4% to 463 million. This is year over year. And what really was not good is comparable store sales. So comparable store sales were only up 4.1%. And that might not sound that bad.

And people might say, well, growth is growth if they're opening new stores. Well, 4.1% on their existing stores is actually below the inflation that we've seen in the last year. And definitely their costs are increasing too. And I think this is the first thing. And there's a couple of things that weren't great in this earnings report. And there's a couple of things that weren't great in this earnings report. But this is the first thing that I think stood out for me is that 4.1% same store sales growth. And Brayden, what's your kind of view on that?

I'll continue afterwards. This was the one that I think the market was the least happy with. Because you see net revs up 13.4% and off really tough comps, okay, that's okay. But you're looking at the story and you go, yeah, well, there wasn't many store openings, especially in the US, which is something that's a lever that they can pull each quarter to see a boost. And you look to the comp sales and you're like, okay, well, this didn't supplement it. And it's such a deceleration. And we've seen a decline in the traffic and their guidance is no good. The stock's had bad sentiment. It hasn't really had a lot of momentum. And then people are like, is this another flop in fashion?

And I think that that is an overreaction, no doubt. I think that that's certainly an overreaction. overreaction no doubt i think that that's certainly an overreaction but this quarter was pretty much as bad as you could have expected for for the stock like i wonder if you share a similar sentiment yeah yeah i mean it was definitely not good for the stock um i think and i think it also goes right uh when we talk about it we constantly will say like or i know a lot of people kind of try to compare it to lululemon because it's a canadian play well the issue is if you try to compare it to lululemon and lululemon is still doing quite well and growing you know even exceed expectations, when you don't perform and it's that glaring,

your stock is going to take a big hit because you can easily look at a somewhat peer. I know it's not exactly the same, you know, category, but it's still fashion, I guess, or, you know, same broad category if you want. And, you know, that's one thing where I think it's a bit alarming from that perspective perspective I'm like you though I don't think they're going away anytime soon and one bright spot here is that US sales grew 22% and they now represent 54.4% of revenue and there's still some potential growth in the US so we have to keep that in mind but really really, the margins were not good. And that was one of the things also I think investors looked at. So gross margins decreased a whopping 5 also down close to 50%. Inventory levels remain elevated at $485 million. And some good news is that they only lost $8 million in free cash flow

compared to a loss of $31 million last year during the same quarter. So that is something that, you know, there is some, some, you know, relatively good news here. Now, to continue on what wasn't great, unfortunately, Jennifer Wong, the CEO of Aritzia said that they are facing more challenging consumer environment, and they are seeing a deceleration in traffic trends, which they believe reflects the macro economic pressure on consumers. So essentially, consumers have less money to spend on Aritzia clothing. That's just what it means. And they have identified some opportunities in newness of the product assortment. And translation for this is some of their products are not resonating with their clientele anymore. So they need to refresh it. Translation, it's now,

anymore so they're they need to refresh translation it's now they're all sick of it well yeah exactly so you have to sometimes read between the lines a little bit and what's not great about this is if you go back to the inventory levels that are quite high um if you have things that are not as much in demand for your consumer anymore uh what you'll probably have to do is you'll have to do some sales and that's discounting discounting discounting exactly so that you know there could be a pressure a bit more on margins going forward so that's something to keep in mind if it's a company on your radar here and the last thing i'll mention here is they expect revenue to be flat or slightly down in Q2 of 2024 compared to the previous year. And for margins to decrease by 750 basis point, which is very significant. Of course, that's compared to the previous year. So

it's not a decrease compared to this quarter. So, you know, let's not necessarily panic here. But they also expect SG&A expenses to increase significantly as a percentage of revenue. So that's another thing that wasn't great in this earnings release. So I don't know if it's an overreaction from the market. I don't know what you think specifically. I just know it definitely was not great. And it could potentially be a buying opportunity if you believe in the business and you believe that this is just a kind of speed bump in the road for Aritzia.

And it's actually not a major kind of issue that could be plaguing them for several years to come. that could be plaguing them for several years to come. And what I'm showing here is just, it shows that their inventories level has essentially been over 400 million, so pretty elevated since August of last year, so for the last year or so. And you also have their operating income margins that are significantly down over the past couple years.

So those are two things that I would recommend anyone looking at that name to keep an eye on. One thing, I'm going to show my screen too. The one thing that's really important to notice here is I have here on Stratosphere the multiple segments, which is the Canada revs, the US revs. We also track e-commerce revs and all that stuff. But the two geographical segments of the Canada revenue and the US revenue have shown significant growth. Absolutely. Especially that US line item. And the comps here are really difficult. And I think that there's also some seasonality to discuss here. If you see, so I have it up on quarterly, Simone, you can see May is not a good quarter end typically for the business compared to the summer and fall seasons. to the summer and fall seasons. And so that's very noticeable here. They said traffic's down,

but if you're an owner of this business, this can't be a quarter that is thesis changing, in my opinion. You have tough comps, tough seasonality, and you have just some brand weakness that you see across every phenomenal story that brand is very important, the Lulu comp. And so I do think that this is an overreaction. I'm not an owner of the stock. I don't do fashion for the reasons of this presentation here. But I do think that this is a bit of an overreaction from the market. If you want to own this stock long-term, then this can't be something that completely changes it. Look, I'm going to pull up the comps on growth rates for the two segments. And you're seeing it trick down. You're seeing it trick down. But we're coming off of 79% on the US line item, 57%, 55%. It is way, way elevated from just two years ago. Way, way elevated. The unit economics on each store are fantastic. They're incredible. People still love the clothes.

Yes, they probably need some refreshing. Yes, they probably built that inventory too high. need some refreshing. Yes, they probably built that inventory too high. Yes, you're going to see some discounting. Yes, you might see three more meh quarters. But if you're actually a long term investor, the short termism of the market is a trap here in my humble opinion. That doesn't mean I'm excited to buy the stock or think it's super fantastic value. It's just not my style. But don't be fooled by the huge drop in the short-termism of the market when you zoom out just 10 quarters and you had 10 amazing quarters in a row and two soft ones. That's not really how to analyze a business in my perspective. So yes, the quarter sucked. And yes, zoom out. I think that you need to do both here. Yeah. I mean, I think that's a good point. I probably have a more nuanced view here

is that it shows how difficult the fashion industry is to have a long-term profitable business. I think we're seeing that with that quarter. And the other thing I would say is it's not a company, if I would own it, that I would, you know, just check once a year. I definitely would stay on top of it because there are some, like you said, there's a good chance in my view that this is just short-term and long-term they'll do quite well. But there's also scenarios where you know it may be the start of a kind of downturn that is prolonged and maybe they did expand too quickly

and the macroeconomic environment kind of mixed with the maybe some of the items are they're unable to produce some high demand items like they have in the past. Maybe there's a combination of things that happen that really put a damper on growth. I'm not saying there will, I'm just saying that it's something I would definitely just keep a close eye on. I would follow every quarter and I would not make a rash decision in terms of selling, for example, but I would definitely make sure that uh you know even slight improvements i would make sure there are and i would also make sure that the ceo whatever predictions she's making or guidance that you know it actually comes true because if it starts you know not happening

then at some point you have to start being concerned by the leadership of that company. Yeah. You also have the like, look at all the quarters as Jennifer Wong is the CEO. And I think she's going to do a fantastic job. So it's too early to tell really. I think that the big takeaway here from me, and I'm sure you'll agree, is to know if something's really just a short-term bad quarter and the long-term is good. You have to know the business really, really well. You have to know the business extremely well and be intimately aware of the product, their competitors, the landscape, the sentiment around the brand. Those things really, really matter here. And you and I are not in a position to be good at that. Whereas other businesses we own, there's a huge sell-off and work straight to our checkbook to add to the position because we know it really,

really well. And if you're in that position here to know if this is a short-term or have a hunch on it at being a systemic issue in the business, then act accordingly. The takeaway here is if you own it, you got to be in that position to make that call. That's the key here for me. No, no. Well done. Nothing more to add there. Yeah. Thank you so much for listening to the podcast. Someone, you see this swag that I got on? Yeah, yeah. Finch up. Yeah. You see the fit. Oh, look, there's there's even a night oh i should say that we have a partnership with nike okay just put our put our logo on a nike sweater um no i i got the fin chat swag on fin chat 2 just launched last week a week today uhChat 2, and it is so good.

Now, it has 60,000 companies on there. So every single stock, every stock in Europe, every stock in Africa, every stock in India, Asia, North America, South America, every stock on the TSX Venture is all in there. What I encourage you to do is when you do use the AI tool and you type in like, tell me the PE ratio of stock X, don't use tickers, use the company name. Tickers is really hard for AI. For instance, Acushnet Holdings, the owner of Callaway and Topgolf, their ticker is golf. So if you're like, tell me how golf was, tell me how their quarter was. It's not very good at interpreting that as the company Acus cushion it, right? Cause it's just like, well, golf is seeing an uptrend and,

you know, in players around the world right recently. So it makes it really hard. So that's my, my hot tip to you is use company names and not tickers. So man, have you tried it out much? A little bit. Yeah. But I've more, I tend to go more straight to stratosphere. So is that, um, the 60,000 companies that own Stratosphere too? On the 27th of July, that is our target launch date of that data being, and it supports the FinChat. We're actually thinking about merging them and connecting them in some way better branding-wise, but that is TBD.

No, Stratosphere is kind of my go-to i mean i like to you know uh type in the things and look at the graphs and kind of pull the stuff myself but uh i'm sure as i get more used to it i will be using uh you know what will dominate our world then you know make humans obsolete in the next 10, 15 years. I kid, of course. Well, maybe not. Thanks for listening. Yeah, I kid, but not really. Thanks for listening. We'll see you in a few days. Take care. Bye-bye. The Canadian Investor Podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.