The Canadian Investor - Inflation Stays Below 3% and Aritzia Rebounds

Episode Date: July 18, 2024

In this episode of The Canadian Investor, we analyze the Canadian Consumer Price Index (CPI) for June 2024, which saw a headline CPI drop to 2.7% year-over-year, with notable changes in food, shelter, services, and energy prices. We also discuss the acquisition of Heroux Devtek by a private equity firm for $1.35 billion, reflecting a 28% premium. Next, we review MTY Food Group's earnings, which revealed slight declines in revenue and system sales, alongside efforts to reduce debt and interest expenses. Aritzia reported a strong first quarter with 7.8% revenue growth, driven by U.S. operations and improved margins. We preview BlackRock's anticipated 8% revenue increase, driven by higher assets under management, and cover Goodfood's ongoing struggles with declining revenue and a shrinking customer base despite improved profitability. Tickers of Stocks & ETF discussed: MTY.TO, ATZ.TO, BLK, FOOD.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 Dan’s Twitter: @stocktrades_ca 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  Web player - The Canadian Real Estate Investor Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. 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. Welcome back to the Canadian Investor Podcast. I'm here with Dan Kent. We are back for a Thursday news and earnings. And I'm actually pretty happy because now we're starting to get a whole lot of news. So it makes things a lot easier to do. Very interesting as well with the data that's

been coming out. We'll get started with CPI, so hot off the press or this morning. Any thoughts before we get started, Dan, on what's been happening in the markets? I mean, my portfolio is doing quite well in July. What a crazy month. In terms of earnings, I mean, there's still not a lot of companies reporting, but there's a few outliers that are pretty interesting companies. Another acquisition of a small cap Canadian stock this week that we'll talk about. So it should be a pretty good episode. Yeah, I think it'll be fun. And obviously, I think your portfolio, that's because there's more of the small caps variety, right?

If I get that correctly. Yeah. Yeah, I have a lot of Canadian small cap stocks that have just launched this year. I won't name names, but I do own probably four or five of them that are just cruising right now, probably because of the CPI report maybe. And just, you know, the potential rate declines further. A lot of the stuff too, like, you know, I do own not a ton of REITs and utilities, but those are doing very well this month as well. So it'll be interesting to see if we like you know i i do own not a lot a ton of reits and utilities but those are doing very well this month as well so it'll be interesting to see if we you know continue to see that that

rotation maybe outside of high growth into more you know defensive real economy stocks i would call them yeah i think so and i mean i'm just pulling up here for a joint tci a subscriber and i'll explain it for people who are just listening. So essentially, over the last month, the total returns when you compare the SPY, so the well-known ETF that tracks the S&P 500, compared to the small cap, so it's IWM, it's the Russell 2000, so small cap that it tracks. So essentially, the returns have really, it's been pretty much since a week. So but over the last month, the return for the SPY is 3%. And over the last month, the returns for small caps is 8.3% with most of this coming from the last week. So like you said, it could be a start of

a rotation because small caps have really underperformed this year. They're up about 9% compared to 19% for the SPY, and it's been underperforming for quite some time, so it'll be interesting whether it continues going forward. Yeah, I think I'd have to go back and listen to the bold prediction episode, but I think I predicted that the Russell 2K would double the S&P 500, so it's got a ways to go, but we're only in July. So it'll be interesting to see if that could come true. We would need a gigantic shift, but it's been a good start.

Yeah, exactly. Now let's get to the big macro before we kind of get sidetracked here because that wasn't on the doc, but that's okay. I'm sure people were interested in hearing that perspective for small calves versus the uh the index now canadian cpi came out uh just today headline cpi was 2.7 percent year over year while it declined 0.1 versus may i didn't see do you know what the expectations were around their level like they hit targets expectations okay pretty much all fronts yet we're

just dead dead in line so the headline number was down from 2.9 in may so that's that's interesting for people following that and we did mention when we recorded that yes cpi was up for may but it was one print so we'd have to wait and see and as as a reminder, it was 2.7% in April. So we're kind of within, it seems like, that range now for the last few months between 2.7% and 2.9%. I don't know if it's the start of a trend, but it'll be interesting to see how July is and then August. Food specifically was up 2.8% over a year and up 0.5% versus May. So pretty big jump versus May. I didn't have time to check what happened last year on a month over month basis because sometimes food will be a bit kind of seasonal when it comes to price increases. Shelter remained elevated at

6.2% year over year and up 0.3% versus May. Services remain sticky and that's something I've been you know hammering on for quite some time so that was up 4.8% year over year and 0.2% versus May. Clearly the rate of change declined versus May but is staying sticky on the year over year basis. Energy as a whole was up 0.5% year over year, but down 2.1% versus May. Gasoline was similar, up 0.4% year over year and down 3.1% versus May. And that's interesting because that is something I think you know that I've been hammering on that quite a bit, where a lot of the, I think a lot of the CPI data and the downtrend we've kind of been seeing is while energy prices have been kind of putting downward pressure on inflation itself. So I think

that's a big risk that is not being talked enough on mainstream media, even on like Twitter, I find it's not something that people a whole lot highlight but i think that's a big risk that people tend to not notice especially because there's so much focus on the headline number and that would have a big impact yeah i mean it definitely it impacts pretty much absolutely everything like well i mean outside of i, maybe shelter. Other than that, I mean, gasoline would impact food prices. It would impact, I mean, absolutely everything. So it's definitely an important metric to keep track of. I mean, gas here in Alberta, at least gas has remained relatively steady for the better part of the year. I think we're like a buck 55 a liter now, but I think that's one of the cheaper ones. How much are you guys? I don't know.

We don't use our car all that much. So we fill in maybe once a month and one of our main car once a month. And then our second car probably once every two and a half, three months, which I'm due to fill. And we have to put premium because they both have turbos in it. So it's always a bit more expensive. But yeah, I think it's probably a bit more expensive but yeah i think it's probably i don't know like uh probably in this similar range i would say i'm just kind of

going on memory base on the last time i filled up yeah i mean i know inflation here in alberta is still i think we're like one of the highest in the country right now but that's mostly just because of the shelter and uh yeah and just gasoline prices overall too. But good signs from this point. Yeah, a lot of inter... Like you said, yeah, interprovincial migration is huge right now. That's it. And now to continue on some more categories here.

The three, the two I'll mention here, actually three. So clothing was down 3.1% year over year and down 1.9 percent in may versus may durable goods and semi-durable goods were both down uh slightly down year over year and month over month and what this tells me and we've talked about this quite a bit is people are cutting back on things that are non-essential and clothing is non-essential semi-d durable and durable goods typically will not be essential as well so there are things you can push back people may say well what if your clothing you know you know is really old usually you know if you're really trying to

make ends meet that is something that you'll figure it out and you'll wear clothes that may be slightly outdated or you know you might even have a hole or two in your socks or something, right? It's something that's exactly what I was going to say. Yeah. So I think that's people, something people will push back in terms of, of purchases. And it really aligns what we've been seeing with retailers. Retailers have been saying that now for a better part of a year that Canadians are shifting their purchases and even in the US we're starting to see it they're shifting their purchases from non-essential to really focusing on essentials and those retailers that have that rely too much on those non-essential are starting

to feel the pinch and Canadian Tire has been kind of the poster child for this in Canada. kind of the poster child for this in Canada. Yeah, like Canadian Tire, Costco, although Costco, you know, they're still doing quite well, because they have a lot of food items and stuff like that. But pretty much even something like Dollarama is stating, you know, even though they're like cruising in terms of overall results, just because, you know, more Canadians are heading to discount stores, like They're still mentioning a slowdown in those discretionary items because it's not on the priority list right now for a lot of people. Yeah, exactly. And just to round this out here, so something we always talk about is the measures of core and core CPI, because the Bank of Canada tends to focus a little bit more on that. So two out of the three measures, of course, CPIs were down.

CPI common was down from 2.4% to 2.3%. That's all compared with May. This uses CPI for commonly purchased goods and services. CPI median was down to 2.6% from 2.7 percent this uses the median price increases so the 50th percentile the cpi basket and then the last one cpi trim was flat at 2.9 percent so this is probably the cpi trim the one that people when you say like core when you talk about core cpi in the us for example this is probably the one that's the most similar because essentially removes the most volatile components on both ends. So the ones that decline the most and the ones that decrease the most, I will remove

that and then you get this CPI trim. That one stayed flat. So I would say overall, I think it was probably a good CPI print versus what the Bank of Canada could have expected. You know, overall prices are declining. The headline number, two out of the three measures for core CPI. So if I had to wager, I mean, I don't know, like, who knows what they'll do at their next meeting. But there's probably a good chance of a cut if I had to wager at this point. Because now we're seeing that, you know, the inflation data, at least for CPI is looking a bit better, at least this month

compared to last month. Or maybe they'll, maybe, you know, the other side is they'll wait a little bit and try to get a few more months of data before they actually start cutting. Well, I know they were saying that the markets were pricing in, it bumped up from some like 78% to 90% that they would cut next meeting. So I mean, 90% is pretty high. That's probably the highest it's ever been leading in to the meeting. see what they actually trim out because right now like in terms of overall volatility i would say that you know clothing and shelter are probably like the two ones that are like widest on the spectrum and the most volatile so i wonder if it would trim out something like that do they actually say what they remove or i think they must do somewhere but i don't think they would on the big release unfortunately yeah but uh that's a good question so it's it'll be it would be interesting i'd be curious to see what they would remove it good question so it's it'll be it would be interesting i'd be

curious to see what they would remove it's probably like it's probably a couple key components i mean energy is crazy volatile so if that's removed it's not exactly the best indicator but uh yeah it was a good it was a pretty good print like you said the last one you know it was it looked pretty scary there last month but as you said it's it's just one print. Yeah. And I misspoke. What I meant is continue cutting, not start cutting, because we all remember that cut in June. 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.ca forward slash host. That is airbnb.ca forward slash host. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians. And we are better for it.

When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see. Because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world. Well, folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and

effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank, is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. So now we'll shift over here. I think we've talked enough about the CPI numbers. So do you want to talk to us about that small cap company that got acquired by a private equity firm? Yeah. So how do you pronounce this? Heru? DevTech? So Heru DevTech. Yeah. So another small cap stock got scooped up at a pretty big premium by a private equity firm last week. So

they do have smaller business segments in terms of hydraulics for planes and actuators and stuff. But for the most part, this company just constructs landing gear for airplanes. So the deal was for $1.35 billion, which represented a 28% premium over the trading price of the shares at the time of purchase. And even if we look to the company over the trading price of the shares at the time of purchase. And even if we look to the company over the last while, like its share price had gone up by quite a bit just because of, you know, a bit of a recovery in terms of small caps. So it's a 28% premium over, you know, a stock price that was doing quite well. The deal includes a $40 million cancellation fee, which would have to be paid by Heru DevTech in the case they don't want the acquisition to go through, like something falls apart on their end.

And this would include if another company were to come in and bump the offer up, and maybe they'll pay more for the company. In that side of things, they'd have to pay $40 million to the private equity firm. In the case, on the other hand, if the private equity firm backs out, the company will be given $63 million. So shareholders who purchased in 2022 lows must be pretty happy. This is pretty much the stock has tripled since then. So there's no doubt a lot of small cap companies, they're cheap right now. They were cheap back then in 2022. And we spoke probably a month ago now about another small cap Canadian stock, Park Lawn Corporation, a company that I thought was heavily undervalued for quite a while, got

bought by another private equity firm as well. The premium in Park Lawn was quite a bit more. I think it was 62 or 64 percent. But shareholders of Heru DevTech had got to be pretty happy with a 28% boost to their shares. So the deal is for $32.50 a share. And as of right now, the shares are trading around $31. So I mean, there's a bit of arbitrage there, but not really enough, in my opinion, ever make it worth it to kind of buy to take advantage of that gap. The deal is expected to close in March of 2025. If it didn't close, sorry, if it did close,

somebody who bought would earn a difference of about 5%, but you'd have to hang on to your shares for what is that, nine months now to earn that 5%. But if the, or if the gap closes, obviously it could close before the acquisition closed. But if the deal fell through, I think you'd no question see the stock price fall probably back to the levels it was trading at pre-acquisition. So there's some pretty high risk there.

I know a lot of investors kind of look for these arbitrage opportunities that exist when these acquisitions happen. I mean, one of the most notable was probably Activision when they got bought by Microsoft. That was actually one that I ended up buying and holding. Even Buffett, I think, played the arbitrage on that one. Yeah. Yeah. So I bought that and held. And it actually ended up working quite well because you had to hold through the 2022 nastiness of the S&P 500.

So I think I ended up making... That was a big arbitrage. I think it was 24% or something just because regulators didn't really know ended up making that was a big arbitrage i think it was 24 or something just because uh regulators didn't really know yeah sorry people didn't really know yeah yeah there was a lot of uh regulators not just in the u.s i think in europe too that were questioning the deals so yeah you uh had to put on your sealed bail seat belt and hang on tight if you wanted it to be able to hold on and actually pan out, which it did. So that's a pretty good play. Oh yeah. I remember they would come out, every single piece of news on Activision would either send the stock up like 10, 15%,

close to that acquisition price. And then they would come up with another article about how there's a good chance it's going to get declined and then it would just plummet again. So, I mean, for something like that, I just bought it. I didn't look at it for, I don't know how long it had to be 12 or 15 months, but it ended up working out quite well. But, uh, as soon as they get really tight to the acquisition price like this, I mean, a lot of people, you know, they look to something like this, but I mean, to hold it for 4.8% for nine months until it closes or run the risk of something bad happening here. I mean, in my opinion, it's not really worth grabbing that 5%. Yeah, I think arbitrage tends to make more sense when there's a bigger gap and you might actually also like the company. So if it doesn't pan out,

then you're fine with holding the shares. I think those are the cases where I would look at, you know, doing arbitrage play a bit more. Let's say there's a 15, 20% gap because there's a lot of uncertainty with the deal, but you still like the assets and the company. Then to me, it can make a whole lot of sense to play that arbitrage because of that, because it's almost a win-win situation, right? Yeah, that was the one big thing with Activision. Even if it didn't go through, I didn't really mind owning Activision. I mean, I probably would have been in the red a bit because I think if it actually did fall through, the share price would have probably dropped a bit, but not to the extent of something like this, where, I mean, even in the case of Park Lawn,

I mean, it wasn't trading at its share price, but I mean, you want to take advantage of a small arbitrage opportunity on a 60% premium to an acquisition price. I mean, it's high risk in that case, not really worth it, in my opinion. But yeah, I mean, this is the second small cap Canadian stock that's been scooped up by a private equity firm. I believe Park Lawn was by a US PE firm. I don't know. I didn't get time to look into

who actually bought this company. But yeah, I don't know. Maybe, I bet you it's not the last. We'll move on before I start ranting on my true feelings about private equities. So we'll move on here to MTY Food Group. So we've talked about them. I think the last earnings that they had. So revenue was down 0.5% to $304 million.

System sales. So that's important because it is mostly a franchise business model that they operate with all their different brands. So system sales were down a bit less than 1% to $1.46 billion. In their earnings release, they said that sales were relatively stable. Not a fan of using that kind of language personally. I like it when they say how it is, not kind of using these vague words because it's not great to be honest to have stable or flat sales and in this case slightly down when you're seeing an inflationary environment. So that is to me like pretty concerning right there because your sales are not going up and obviously the cost of everything is going up so clearly there is a bit of an issue with the business here at least there

are some kind of orange flags i would say the good news though is that system sales were up in the u.s but that was barely up at below one percent canadian sales saw a decline of three percent same store sales were down 2.1% versus last year. So on the call, management said that maintaining traffic has been difficult over the last 12 months. And it's going to be key to maintaining sales. I mean, I agree that that will be key. And I think people who are interested in this name will have to figure out how they plan to do that. Because clearly they're facing some big headwinds.

And it's not, to be fair, it's not just them. It's just people don't have as much money to spend. That's, I think, just the reality. And earnings per share and net income were down by 10% for the quarter. Free cash flow was down 18% to $33.3 million for the quarter. On the bright side, they bought back $12.8 million worth of shares during the quarter. And they also reduced their debt by $16.3 million for the quarter and $77.9 million over the last 12 months. So that is definitely some good news.

million over the last 12 months. So that is definitely some good news. And if you look at their interest expense as well, you clearly can see that they are benefiting from lower, you know, lower debt because most companies, it's not the case right now. They're seeing their interest expense go up for the most part, at least stay stable if they have fixed term debt. And that is something that we've highlighted recently. And I think it's really important when you look at businesses, especially in this type of environment, if a business has a lot of debt, or you're seeing the interest expense kind of go one way or the other, but especially if you're seeing it go up, you definitely want to understand how the debt is structured, even if they don't have variable or revolving facilities just a synonym even if they don't have variable debt i mean they could still have term debt that is coming up that they will

have to refinance at a significantly higher rate so these are all things to consider but mty food group definitely concerning on the sales front there are some positives like i just mentioned and for people who are looking or interested in this name, you definitely want to understand how they plan on kind of turning things around for sales. And you want to understand, like I said, how debt will be going forward because they've made some strides in that department, but debt is still relatively high for that company. Yeah. So if you can see in August, like it was low and then, and then it spiked up the interest expenses. Like I was kind of looking, there's usually two situations that

this could be. They either have a ton of floating rate debt and they just got hammered by rising rates, but they actually made an acquisition, um, of barbecue holdings, which is like a U S based company. So that's probably where the debt spike came from. And then in turn, it could be floating rate debt as well. Rising interest rates obviously impact that. I mean, MTY is kind of like a double headwind because first off, slower consumer, less fast food sales, stuff like that. But I think they have a ton of like mall exposure. You know, a lot of their stores are in, you know, food courts and things like that. And I mean, obviously with spending down, you're probably going to have activity at malls down, stuff like that.

So that's going to impact it as well. I believe they have like so much shopping mall exposure that they actually like segment. I didn't get a chance to look at the quarter, but they actually like segment out to like kind of talk about how that portion of the business is operating. But yeah, it's not really a good environment, especially like, you know, if sales are flat, especially with food inflation.

I mean, the one that's been going up quite a bit. I mean, you need to be at least keeping pace with that and you're definitely not seeing it in Canada. Yeah, exactly. So I think not much more to add here so do you want to move on to the next company we have on the dock yeah so aritzia fan favorite yeah i know a lot of listeners own it so definitely i think there's going to be a lot of people listening to this closely yeah i uh i own like i own aritzia we've covered it over at Stock Trades Premium for quite a while. They posted a

pretty solid quarter. Revenue came in relatively in line with estimates, but earnings per share came in about 35% above expectations. Overall revenue grew 7.8% year over year. Comparable sales were up by 2%. This isn't really anywhere near the growth rates the company was putting up just a few years ago. But the fact that it's, you know, even putting up growth in a pretty tough environment, I mean, this is like a mid tier retailer, it's not exactly where you go to get, you know, cheap clothing, it's not exactly where you go to get ridiculously expensive clothing, but it's definitely you know, it falls in that in that midline, you know, area. If we segment out Aritzia's business, it's, it's pretty clear the U S and is pretty much driving all of the growth. So year

over year revenue is up 13%. And in total U S revenue makes up more than 57% of the company's overall business. I believe like even a year, maybe 18 months ago, uh, this U S revenue, you know, that's when it started to eclipse the Canadian revenue. But it wasn't, you know, the US portion of the business is definitely growing at a much faster pace than the Canadian end. I wouldn't be surprised, you know, in the next year or two, we see US revenues, you know, exceed 70% of the company's business. I mean, the US market is just that much larger. They're not as developed, I would say in the US. So there's, you know, more, more room for growth there rather in the Canadian end where they're more of a established brand. And, you know,

we just have what one 10th of the population. And at this point, a much weaker consumer margins and inventory have been pretty key factor for Aritzia. Followers of the company may remember that the company made a few missteps with its inventories during the pandemic. That left it pretty much with ballooning overall inventories. And as a result, it had to mark down quite a bit of product, which in the end hits margins pretty hard. Inventories now sit at 396 million. That is down 18% from one year ago today and is down 22% from the all-time highs it witnessed in 2022. I think it got up to like 510 million or something in terms of inventory. Gross margins increased by 510 basis

points, 5.1%. They now sit at 44%. These are, you know, more so the margins that are, that are typical of the company. And they attribute most of the boost due to, like I said, lower markdowns due to inventories being reduced along with, you know, more strength in initial pricing strategies on, you know, new product lines or, you know, turning out higher margins from newer products. They sit at 119 boutiques, which is four more than they reported in the first quarter of fiscal 2024. So there's a bit of growth there. Maintain most of its guidance, expecting high single digit revenue growth in the coming quarters. Expects to continue to expand margins as it just, you know, continues to navigate its way through a pretty tough situation.

as it just continues to navigate its way through a pretty tough situation. And again, when you look at that US growth relative to Canadian growth, it's not just the fact that Canada's a smaller population. Revenue in Canada only grew by 1.5% year over year. And the US, again, growing at double digits. They don't segment out Canadian same store sales growth versus US same store sales growth. They just have that one, you know, overall same store sales growth. So it's a bit harder to see like how the Canadian market is doing on that basis. But overall, it was a pretty good quarter from the company. They ended up closing the day. I think it was 15% in the green yeah well according to the cpi data i would say that the canadian was uh clothing was down 3.1 percent for aritzia so i'm gonna go with the canadian cp

yeah i mean i would imagine it's it's not gonna be if they had canadian numbers yeah flat to you could even probably see a decline, especially when you see, you know, 13% growth in the States versus one and a half from Canada. It's highly likely that, you know, Canadian same store sales might have declined, but they don't push that out. Yeah. And one thing I think people that are interested in and they more own it, one thing I would definitely keep an eye on is those operating margins.

Yeah. Because they're still pretty low right now. The gross margins are going up. But I always take gross margins with a grain of salt because it's just such a small part of the actual expenses when you think about it. The operating margins include way more. And they bought them at 2.6%. Now they're sitting at 7.2 percent but before that so in 21 2022 they were more in the you know kind of mid i would say teens mid-teens low teens so

that's something probably you'll want to see with aritzia is at least these margins hitting double digit again on a consistent basis i I think it'll be a good indicator that they're on the right track. Yeah. The recovery in the operating, because ultimately the gross margins are just revenue and cogs, like cost of goods sold. So the operating margins are going to give you a better picture of just overall margins and profitability. And those have been, like you said, relatively flat, i mean it was it's a lot better than it was in 2022 i mean you can see it they went from like 15.2 but like their margins got slashed like uh it like massively and i mean as a result you've seen the stock took an absolute dive too

i think it went down to 20 bucks a share and it's now i think it's close to 50 or high 50. So I mean, it's a good turnaround quarter for sure. They posted a few quarter strong quarters in a row after some, you know, a fairly ugly 12 to 18 months. It's okay. I'll go cry in a corner with my Lululemon stock. Yeah. I wonder like, is that going to be the next one? I mean, obviously, both of those companies are facing a little bit different situations. I mean, Aritzia, I think for the most part, it was all that that inventory. They ended up spending a bunch of money on a bunch of inventory and in the end had to market down a ton because I mean, 2022 hit and it just it hurt. Yeah.

And I think that's one of the issues, right? Lululemon was performing a lot better than aritzia and then things that's kind of flipped around where aritzia now is performing a lot better than lululemon i think one of the things impacting lululemon is just how nike basically i think yeah kind of the uh let's just say the friendly fire or maybe not friendly fire but essentially the ripple effects of Nike having struggled so much. I think a lot of investors are kind of projecting that into Lululemon. And, you know, I'm still a believer in it. I kind of added during the downturn. I'm not

I'm not adding any more in Lululemon. So I'm just kind of waiting and seeing what will happen. But the latest quarter, I thought everything looked pretty good obviously in North America growth that kind of slowed but you have China that it's picking up but again there could be some headwinds going forward for lemon as well whereas Aritzia you know they're more focused in the U.S. market so as long as the U.S. does well Aritzia should do well as a whole, because like you mentioned, Canada is becoming a smaller and smaller part of their revenue. Yeah, I think Lululemon is like partially, like you said, collateral damage just from Nike. And there's also like whenever these retailers go through situations like this, especially like clothing lines, people tend to freak out about how they're losing the brand power. Nobody know, nobody likes the clothing anymore.

And I mean, in a lot of situations, well, I wouldn't say a lot, but in some situations it does happen. I mean, look at Canada Goose. Yeah. They were one of the fastest growing retailers in Canada. They were exploding in China. And then all of a sudden, like the brand just kind of fell out. It's not as popular anymore.

There was a lot of, I mean, they had some issues in terms of you know the animal situation and yeah a lot different type of situation but uh there's a lot of like retailers are crazy crazy volatile like depending especially right now what's being hit a lot is luxury so i know burberry got hit a whole lot. I saw that in the news. They got, I think their stock is down close to something like, if not, probably 50%, more than that, actually. So in the past year, Burberry, so the famous brand, you know, based in London, in the past year, it's down 64%, which is, I mean, I don't care much about luxury goods. That's just me but i know like it's a well-known brand and just to give you an idea and i think canada goose we can say it's

a luxury brand as well so those luxury brands have been hit pretty hard lvmh has been faring better but i think it's probably because they have more of a suite of brands if you'd like they have more variety there. But that's something to keep an eye on. Maybe it's kind of the bottom for these luxury brands. And now is the time to buy. Because during the pandemic, there was a lot of people that were buying luxury items that could not afford it. And I think now, you know, people are making sure that they're filling their basic needs according to the Maslow, you know, pyramid of needs.

So I think it's we're seeing that shift. I don't know how it'll go forward, but something to look into if people are into these luxury brands is maybe a good opportunity. Now that sentiment seems to be pretty, pretty and pretty low for those. pretty low for those. Yeah. And I mean, if you own a retailer, like a clothing retailer, you should probably expect this type of volatility. I mean, if you look at a long-term chart of even Lululemon, there is plenty of situations where it was down 40 plus percent, and then it goes up again and they're highly cyclical. I mean, I would imagine Aritzia is doing quite well right now, but I plan to hold the company for a while, but it's almost inevitable that you're going to see another big swing in price. That's just kind of what happens

with these companies. Long-term stock charts, you can just see huge dives, run-ups, huge dives, run-ups. So it takes a long-term approach to hold these companies. Yeah, a long-term approach. I mean, it can be dangerous holding fashion, right? There's a big cemetery of once-upon-a-time companies that were darlings of the markets, of the public markets that are now either bankrupt or restructured, but have crushed basically returns for investor. So it's something just to keep in mind that you have to make sure you really kind of believe in the company and that you understand the fashion aspect of it because it can be pretty tricky to hold. 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. dot C-A forward slash host. So not so long ago, self-directed investors caught wind of the power of low cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians and we are better for it. When BMO ETFs reached out to work with the

podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple, yet incredibly low cost and effective. exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't

checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. I think we've talked enough about fashion. Let's move on to the smallest asset manager in the world. Oh, sorry. I meant the largest asset manager in the world. So for those who are familiar with that, you'll know that I'm talking about BlackRock. Revenues increased 8% to $4.6 billion, primarily driven by higher markets. Surprise, surprise, which resulted in higher AUM.

So for those who have been living under a rock, yes, the markets have been doing well, especially over the last, what, since the start of 2023, pretty much at this point. We've had a little gully as they would say in the big short yeah yeah a little gully around october and then it picked back up but since uh 2023 it's been pretty good right yeah they what is it the s&p 2022 was nasty but then you start off you start off 2023 and the s&p 500 is up 44 since the start of 2023 so just to make sense of it so higher assets under management so aum means that they essentially rake in higher fees because it's typically based on like a percentage of asset under management so

clearly you know the higher asset prices are, the more that BlackRock will be earning. And then you kind of you factor that in with the inflows that are coming in. So the total new money coming in, then it's clearly pretty good for BlackRock. Operated income was up 11 percent earning per share, increased 10 percent year over year to $10 a share. AUM increased 13% to, yes, $10.6 trillion. And since 2012, AUM has almost tripled. So it went from $3.8 trillion to $10.6 trillion. So it's just, it's completely insane how large BlackRock is. And I'm just going to share this for our joint TCI subscriber. And you can really see just the increase of assets under management since 2012. And you can make a case, right, that we've been pretty much in a bull market since even before then.

Obviously, there has been some correction. Obviously, there was the March 2020 COVID crash, but the markets recovered relatively quickly. It just took a couple months, and I think we were back to that level. So all that to say that a company like BlackRock will definitely massively benefit from that. And you just see it with their asset under management here. Yeah, I mean, their ETFs haul in a huge amount of AUM, like iShares. They're just, it's hard to fathom like how much they can keep growing. Like I know that's been a lot of kind of the bear thesis on BlackRock for quite a while. Like how can they keep growing? But I mean,

their assets just keep like double digit growth every single year. And they're just one of the most, well, they got to be are they the largest asset manager they have yeah yeah largest asset manager yeah i think fidelity and vanguard are two and three not quite sure in which order but black rock is the largest yeah yeah and i uh like i'm kind of curious as to why they haven't done better over the last bit like especially with just the overall market activity, I would have expected them to do a bit better. But I think they trade at a pretty hefty premium. And I believe a lot of their growth is primarily through acquisitions. Now I know they've made,

I was trying to look it up, I probably won't be able to provide any commentary on it like right now. But they have made a couple big acquisitions throughout the first you know six months of the year as well which should continue to help them grow but uh yeah they're crazy they're they're basically in line with the market so whether you look at the five last five years or 10 years there are like almost to that dot like within a couple percentage points of the SPY, so the S&P 500. Oh, okay. Yeah, so if you're looking at 10 years total return, so 232% for BlackRock, 239 for the SPY. So let's just say over that period, it's kind of a wash. And then over five years, same kind of thing.

So 103% for the SPY and 100% for BlackRock. So you're essentially like right in line with the market, which is pretty incredible when you think about it. It makes sense. It makes sense, yeah. I mean, obviously they have other like, you know, fixed income ETFs and, you know, multi-assets ETFs. So they have other things. fixed income ETF. So, and, you know, multi-assets ETF. So they have other things, but interesting to see that the returns are, I mean, you can pretty much, it's just in line with a market. I think it's so close at that point. And what's interesting too, is a lot of people are familiar

with iShares, right? And BlackRock owns this, but they purchased iShares in 2009. And at the time it had 300 million, must've been 300 billion. I think I misput, like I put that by mistake. So I'm just going to say 300 billion. I would say a billion, yeah. Yeah. And assets under management, and now it has over 4 trillion. So it's been a very impressive purchase for them. And then if you look, and it's always interesting to look at the investor presentation for BlackRock because they show all this kind of breakdown, how it looks like. So clearly, when you look at their whole portfolio, they're breaking down between client type, style,

product type, and region. I won't go over all of them, but client type, it's pretty interesting. So 30% is institutional, 27 is retail. I think retail probably falls more in the mutual fund category here. And then 43% is ETFs and ETFs can be retail or institutional. So just so people are more aware of that, but institutional would be stuff like, for example, if you have a defined contribution pension plan and you have BlackRock offerings there, that would be institutional. And then in terms of, so that would be the base fee where they actually get them in terms of the breakdown. And for the assets under management, it's 54% institutional, 9% retail and 37% ETF. So clearly they're getting most of their fees from retail and ETFs and a bit less on the institutional side, which is not surprising because when you

start offering institutional funds, typically there's quite a bit of competition. And because they are larger clients, they'll usually offer better fees because of that. Yeah. And I mean, it's it's kind of hard to see where this end of things is going to slow down, especially with the popularity in ETFs, like just how more retail investors are going the ETF route rather than individual portfolios of stocks. And I mean, institutions drive most of the money in the markets. I mean, retail is it's a relatively small segment compared to, you know, institutional investors, but I think still the gravitation towards a lot

of people to, you know, buy all in one funds or even make up, you know, their own little portfolio of, you know, five, six ETFs. And I mean, iShares is, you know, the one that is often in people's faces, especially in Canada. I mean, I know BMO is kind of coming out of nowhere and they're becoming one of the largest now, but iShares is certainly, I think they're actually bigger than Vanguard here in Canada. I don't know if they are in the United States, but I believe they're bigger than Vanguard here in Canada. I'm not sure. Yeah, that's, but yeah, those are like the two names that most people will be

familiar with whether you're in Canada or the US then it would be obviously it would be BlackRock or iShares and Vanguard but definitely like you said BMO is making a bit of a push I know one of our sponsors Fidelity as well and in terms of asset of management, so index products are actually by far what is the most prominent here with $7.1 trillion in asset under management for index products representing 68% of all their AUM. 25% is active, so actively managed, and 7% is what they call cash management. And by asset type, equity comes first at 51%, fixed income second at 23%, multi-asset 8%, and alternatives at 12%, and the remaining balance being cash management, like I mentioned.

So it is just interesting to see and look at BlackRock because it really kind of gives us some idea of where the market is. Kind of putting its money. And during the last thing I'll finish on. During the quarter they added $81 billion in net inflow. So that's what I was talking at the beginning of the segment. Is that yes the market going up.

Increases their asset under management. But obviously inflows are new money coming in. Specific to the Bitcoin ETF. That added another $4 billion in inflows during the quarter, making the total of $18 billion for AUM since the launch. It's pretty impressive and definitely surpassing all the kind of boldest predictions for the Bitcoin ETF. And during the quarter,

they returned more money to shareholder as well with $500 million worth of share repurchases. Yeah, I was looking up. I was trying to look up. So XIU, which is the largest ETF in Canada, which would be the iShares TSX-60 ETF, it's got AUM of $12.6 billion. So there's more money in the single crypto etf that iShares has than the largest etf in Canada yeah so you can you can tell why Larry was pushing the bitcoin etf I mean the fees may be low but when you're talking about that many billions of AUM even a low fee can can really

you know start making a difference at the bottom line. But I think that's it for BlackRock. Do you want to finish with Good Food? And then we'll wrap it up for this episode. Yeah, so Good Food is kind of another one of those Canadian companies that kind of reports outside of the main earnings season. So we always end up talking about it on here, but they continue to struggle. It reported its third quarter earnings. They continue to decline.

In terms of profitability, it was a bit of an improvement, but the decline in revenue is something that investors should probably be concerned with because eventually the company is going to exhaust all of its restructuring options to the point where they, you know, in order to earn more money, they're going to have to generate more revenue. Volume in terms of share price, like it's actually crazy to see volume has effectively dried up to the point where this company actually like poses liquidity issues. There's only about $9,500 in shares traded every day. This is a company I'd look back during the pandemic. So

this company had around $10 million in share volume trading every day. And now they're down to $9,500. I mean, if you want to buy and sell this thing with any sort of reasonable position, I mean, there's arguably not even enough volume here to do it. They never hit a billion dollars in market cap, but they came pretty close at around 990 million, and it's now fallen to just $24 million. So net sales in the third quarter came in at 35 million and adjusted free cash flow came in at 4.2 million. So I checked the adjustments. They're relatively small. So it's just about 470,000 in restructuring costs. So the adjusted free cash flow, it's pretty close to the actual free cash flow generation by the company. Over the last 12 months, they've generated $8 million

in free cash flows. And it's interesting because this puts the company's valuation at only three times their trailing 12-month free cash flow. When we look to year over year numbers, revenue fell by 8%, but cost of goods sold fell by 13%. So that ultimately boosted gross margins a bit, 41% to 44%. They also managed to reduce their SG&E, their sales and administrative expenses by 6% and interest expenses by 9%. So as a result, on a year over year basis, net income improved to a profit of $304,000 versus a loss of $1.1 million last year. So when we look to the first six months of the year, it's much of the same story. However, the company, again, it's scaled back its sales and admin expenses by nearly 20%.

I mean, this does make sense because demand for the product has essentially collapsed. Active subscribers are falling. The company's likely just scaling back marketing efforts and cutting staff. I mean, I used to see good food commercials all day, and now I barely see any. Active customers fell by 11.7% on a year-over-year basis. But the one thing that was alarming is sequentially. So compared to last quarter, they fell by 10.2%. So a 10% drop in customers over just one quarter. So this is obviously not a good sign whatsoever. The huge drop off in active customers in one quarter is just likely a sign that its customer counts are going to continue to fall. The only way this company is going to drive growth at this point is to try and generate more money from its current

active customers. So its average spend per customer did increase by 7.9% on a sequential basis. But I'd argue this isn't really active customer spending more. It's probably more so like cheaper customers that churned, which kind of boosted the average. On a positive note, the company reduced its overall leverage ratio. So this compares debt to adjusted EBITDA from 8.2x to just 2.1x. I didn't have time to dig into like what, you know, how that happened. I mean, that is a huge leverage reduction. So maybe they made a change to their adjusted EBITDA because I mean, to reduce it by that much, and they haven't really reduced debt all that much. So like, I would imagine something there has changed, but I can't really, can't really guarantee it.

I mean, at three times free cashflow and pretty much a market capitalization that equals the cash on hand. I think the company has 26 million in cash on hand with a $24 million market cap. It kind of, you know, looks like a weird value play here. I mean, but they, they have a, they have a ton of debt, like I think 47 million in debt. I mean, it's, it's really hard to see growth unless there's like an immediate improvement to the Canadian consumer. I mean, I'm not calling it a value play, but on like a quick screen, this company is probably going to pop up as, you know, something that's, that's pretty cheap. It has a market cap of like 23 million, but an enterprise value of like 45 or something. I mean, the, the debt situation is, is fairly weak. And I mean, we've seen it across pretty much every

industry, massive shifts in spending habits. I mean struggles of empire whereas loblaw is just cruising uh costco is booming retailers are struggling you know even dollarama is reporting you know less spending towards discretionary items i mean i would say food boxes is about as discretionary as you can get so yeah it's uh yeah unless you get a good deal for it if not it's going to cater to probably a kind of upper middle class kind of demographic uh just because if not people can't afford that and they'll go for the cheaper option of making food from scratch and on the debt front i mean yeah it's increased a little bit i guess but i mean yeah it's not looking that great because the cash actually has gone down dramatically. So it's, yeah, I don't know.

We'd have to check a bit more, dig into the debt, how it's structured and, you know, is it convertible debt or, you know, is there the possibility of whoever the creditor is that when the debt comes due, they'll just be like, well, pay up or work taking you in bankruptcy. I don't know. So it's definitely, you know, there is they've stopped the cash bleed. I think we can agree with that for now, but we'll have to we'll have to keep an eye on it when the earnings are a bit down to see if things are trending the right way in the next quarter or two. Yeah, like that's the interesting thing for me. If you look at the long-term debt, it's gone up, but their leverage ratio has gone down by like 75%. So, I mean, they either had some sort of huge cost last year that bumped that up huge, or they've just changed how they calculate adjusted EBITDA to the point where it makes it look a lot better. It just, it seemed weird to

go from 8.2 X to 2.1 in the course of a year with like no debt reduction or yeah. Odd. Yeah, no, I think that's a good point, but I think we'll wrap it up here. It was a fun episode. I think it was fun to have a lot to talk about. Not that we didn't have fun recording the other episodes, but when it's a bit slower, especially couple weeks you know we had to try and find a bit more news and earnings to talk about but i think we're back now it's gonna be picking back up for the uh i guess it would be the second quarter earnings yeah so i'm always yeah i have to always think about it for a second so second quarter for companies that are reporting more on a normal schedule, maybe a bit different for others. So stay tuned. We'll be back every Thursday. The next Thursday episode will be a bit different because Dan is going on vacation for a few weeks.

So we're recording it early, but I do encourage you to listen to it. We're going to do a bit more of a dive into ETF flows, inflows and outflows next Thursday. Dan does a lot of work on ETFs with StockTrades.ca. So it'll be interesting to discuss. There's been some interesting finding, especially in the last month. And then we'll go over as well for the first half of 2024, because believe it or not, we're entering the second half. So make sure you tune in just to see

some of the trend lines that we'll see. But if not, I mean, definitely follow us. We are pretty active on social media. I'm at fiat underscore iceberg. Dan at stock trades under stock trade under stock trades underscore CA. There you go. That's it. Yeah.

Okay. There you go. I had a brain cramp. So yeah, thanks a lot for listening, everyone. And we'll see you next week. So yeah, thanks a lot for listening, everyone. And we'll see you next week. The Canadian Investor Podcast should not be construed as investment or financial advice. The host and guests featured may own securities or assets discussed on this podcast.

Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.