The Canadian Investor - Recession Warnings from Retail and Canadian Banks Roundup

Episode Date: March 9, 2023

In this episode, we talk about the recent news that Nordstrom will be winding down its Canadian operations. We then look at some recent earnings including Live Nation, Intuit, Canadian Banks and several retail companies. Symbols of stocks discussed: LYV, JWN, COST, WMT, TGT, HD, INTU, BMO.TO, CM.TO, BNS.TO Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense. Register for ShakepaySee 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, with the legendary Simon Belanger, we are talking earnings and news. It's a Thursday release of the podcast today. You're going to talk about some big, big retail news coming out of Canada. I'm going to talk about a gigantic acquisition

of a Canadian semiconductor company. Hey, congrats to those guys who are now just like almost billionaires. That must be cool. And then we're going to talk about some earnings results from some companies we know and love all right simone what do you got for us first yeah so i'll talk about nordstrom earnings and some big news coming out of that earnings release as well so the big news is i'm assuming most people saw it so nordstrom announced its q4 earnings and what made deadlines is that they'll be winding down their Canadian operations. If you're outside of Ontario, Alberta, or BC, you might wonder what Nordstrom is

because they're only in those provinces. There are only six Nordstrom in Canada and seven Nordstrom racks. Nordstrom racks are just their discount retailers, a bit like winners i guess would be if people are familiar with that so nordstrom is essentially a luxury department store we have one in ottawa we also have a nordstrom rack i know there's a couple in toronto or in the gta area too um and i personally don't go there very often and when i do it's because

there's sales because i find this stuff is too expensive. You know what these things are? And I've never understood how they have any product market fit. It is a giant duty free. That's what it feels like. You know, you go to the airport, international flight, and it's like, here's some overpriced perfumes and like way too many sales people that's what a nordstrom is i don't get how they have ever been successful but uh people like this stuff yeah clearly not in canada though yeah well no and their stores are really nice i mean like

they obviously were open not too long ago the one in ottawa is at rito center and they took i think part of the space of where the sears was at, but it was completely revamped. But, yeah, it's not one that I go often. I'll probably go have a look because they're going to be having a lot of sales, and their website actually stopped working on March 2nd. So you can no longer go on their website. They're really being aggressive, so they're looking to wind down everything by june so if you're in one of the region that has and they have a lot of inventory in each location so so if you have you know one nearby uh definitely you might want to go swing by to see if there's some stuff on sale and for context here like their canadian

operation is just a drop in the bucket it It represents 3.6% of total store accounts. And Eric Nordstrom, this is mentioned the following, and I'll just quote what he said. So we entered Canada in 2014 with a plan to build and sustain a long-term business there. Despite our best effort, we do not see a realistic path to profitability for the Canadian business. We want to thank our team for the performance and dedication serving customers in Canada. And you have to commend them. I mean, if something's not working, it's been eight years, you know, and it's been a relatively good economic environment as well during those eight years, you know, if you take out the 2020. So I think it's a smart

business move for them. If it's not working, why drag it out? Now, their full year in Q4 results were as follows. Revenues increased 5% to $15.5 billion for the year. However, they were down 4% in Q4. Net income for the year was up 37% to $245 million, but was down 40% for Q4. Gross profit margins took a big hit for both the year and Q4, falling 150 basis point and 480 respectively. And free cash flow did quite well, doubled for the year. But again, they're seeing some slowdown in Q4. And that's why it's important when you look at full year, I would say also make sure, especially in this current environment, you want to make sure sometimes the earlier results will skew where the business is going. And this is a

clear example. They are guiding for revenue decline of between 4% and 6% for 2023. And I'll actually elaborate a bit more on this later because I'll be looking at the guidance and more guidance for five other major retailers and some kind of cracks that we're seeing in retail for 2023 just to put some additional context over here. But yeah, not an okay year. I mean, I think it's going to be a challenging year for 2023 for

them. And at the end of the day, I think they made the right decision to leave Canada. This goes in the long list of wonderful retail. I don't know about Nordstrom, but in the list of wonderful retailers with a model that works and just doesn't work north of the border. You know, it's the targets. It's the now Nordstrom. There's a list of them. And for whatever reason, it just doesn't translate the same way. And I don't know why.

I mean, for me, every time I walk in there, I go, what purpose does this department store serve? Like, I don't understand why anyone would purposely go there. But again, I am clearly not the target market or target customer. But, you know, if I wanted to go put on, you know, some free samples of cologne, I would do that at the airport. Yeah. And I thought they had done it like i wasn't following the business closely but compared to target that you mentioned target was

a disaster like when they open you would go into their store have the shelves were empty they tried to open the stores too quickly and the supply chains weren't well established and then they just decided to pull the plug that wasn't't the issue with Nordstrom, but you clearly, you know, I guess it's tough doing business in Canada. I guess that's what it is. Yeah, it's clearly not translate. I was just looking it up because I had no idea because the current CEO is his last name is Nordstrom. Yeah, it's part of the family yeah it was founded by john nordstrom and carl wallen in 1871 so this guy's like what like how many generations later running the business very interesting um

i think it's not very common yeah i didn't realize it was founded that long ago i mean i guess it's the u.s debate I guess, equivalent almost. Yeah, basically. Yeah. All these department stores always have deeply rooted, rich, long history, like a couple centuries, which is kind of crazy, the longevity of these things. Which debate will probably benefit from their closure. That's probably going to be one of the benefactor. Yeah.

Good point. going to be one of the benefactor yeah good point um let's talk about germany's infinion which is a semiconductor company is buying uh gan systems for 830 million dollars incredible price tag here and big news in Canadian tech and semiconductors. So here's the top line article. Germany-based Infineon Technologies, which, by the way, is a roughly $50 billion in market cap company. So it's a large semi-company. They just announced on March 2nd, so like five days ago,

they plan to acquire Canada-based GAN, Systems GAN Systems. According to a joint press release, the two have designed a definitive agreement under which Infineon will acquire GAN Systems for $830 million. I believe it's all in cash too, was the other article I looked at, which is, you know, these two guys, John Roberts and Gervon Patterson out in Ottawa, congrats on being stupidly wealthy, my goodness. And so what do they do? GAN systems is the G, capital G, lowercase a, capital N, is the elemental symbol for gallium nitride. And gallium nitride is a material

that is being used for semiconductors. Its largest competitor in terms of material, if you will, if that's a word you can use, is silicon. And so they produce semiconductor components that are smaller, lighter, faster, more efficient than silicon-only chips. Per the Globe, Infineon is a longtime partner already of GAN Systems. They raised $220 million USD to date, this Ottawa company, and includes an $150 million funding round in late 2021. and includes an $150 million funding round in late 2021. So they've raised lots of money, but still, when you're talking about an almost billion dollar exit, these guys are like, I don't even know how they walk around with so much money now. Their use cases for gallium nitride and on their website is Consumer Electronics Data Center and 5G Automotive

electronics data center and 5g automotive renewables industrial other uh so whatever that includes uh they have offices in shenzhen china hasenchu science park taiwan uh which is very close to the getting a kick out of brayden's uh mandarin pronunciation but yeah well how do you know how to say that probably sinchu sinchu yeah i think the h e jone yeah how different was that yeah uh close to its foundry partner tsmc without being technical enough on semiconductors and gallium nitride it is an alternative to silicon and um they have their pros and cons but many believe gallium nitride is the future of some semiconductor applications. Yeah, and for any of our Mandarin speaking listeners, we're trying our best. So if we butcher these names that we do apologize. Yeah, it's like every time I try to say some of these Quebec-based companies, I just refer to you because, you know what, I'll never say them properly.

That ship has already sailed. That ship has sailed so many years ago, but I'm still going to try out here. Anyways, congrats to this company out of Canada. Gigantic acquisition, huge exit. We don't have that many of this scale happen very frequently. So congrats. Yeah, and for those who are not familiar with Ottawa, there's actually a decent tech sector in Ottawa before the amalgamation was called in. People still refer to it kanata

and uh it's where the ottawa centers play as well so there's a slew of like small to medium and some large tech companies that are there so i wasn't surprised when i saw kanata because it is uh pretty well known in the region here yeah that's yeah that's where these guys are from and uh i've actually been there and before i was there i didn't realize that the senators played there oh yeah it's so far it's so far away like i was like i was looking at the stadium i was like wait the canadian tire center is here like you know it's something you would just never know as a guy from toronto who goes to ottawa like once a you know every once in a while but they're very infrequently they are looking to build a downtown so there's uh the team's first sale right wise

idea yeah and ryan reynolds may be a kind of part owner buying it and one of i think the prerequisite is that they'll be able to buy a build a new stadium that's closer to everything yeah and more central dude ryan rey Reynolds just dominates that guy. Like that guy just dominates. He does so many movies. He's made an obscene amount of money. He's way too good at acting and comedy and business to be that handsome. Like that should be, what's going on?

Like, you know, put him and Tom Brady, you know, him and Tom Brady. Like you're not allowed to be this good at everything. But no, I think that's a wise idea for the city. And of course, I mean, tech-wise, you ever heard of Shopify? I mean, Ottawa's definitely up there with some winners. Or Nortel. Not so much a winner, but yeah, let's not go there. Throwback. Yeah. so much a winner, but yeah, let's not go there. Throwback. Yeah.

As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Calling all DIY do-it-yourself investors.

Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time.

And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo-style education lessons that are completely free. You can search

up Blossom Social in the app store and join the community today. I'm on there. I encourage you, go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the App Store, and I'll see you there. So now continuing on the retail trend here. So Costco, the business I love to hate because going there always feels like it gets my blood pressure slightly high, but it's definitely a wonderful business. Now, total revenues increased 6.5 percent to 55

billion this was for q2 2023 so slightly different reporting schedule membership fees increased six percent which is quite amazing seeing that they did not increase increase the fees so to have that six percent increase just shows as there are more people that are actually signing up and becoming members for costco whether i don't know if it's just regular member getting that executive more expensive membership or just you know a slew of new people but still very interesting to see comparable sales were up for US Canada and international comparable sales for e-commerce, was down 9.6%. Not surprising, obviously, when you're comparing to still kind of pandemic-ish quarter year over year. The operating income was up 5%. Net income was up 13% to $1.5 billion. And earning per share was also up 13% to $3.30. Overall, really good quarter.

I will touch a bit about weak retail guidance, but Costco never provides guidance, so I won't include them there. And I think Costco will actually be one of the more resilient big box stores. And I'm going to include Walmart into that because there's two, they're really what separates Costco and Walmart to other retailers or big box stores is that they actually have a pretty good portion of their revenues that comes from grocery related sales. And the groceries, we talked about inflation, but people have had to eat, right? So it's something that pulls people in while they're in the store. They may be purchasing some other things. It really gives them an edge.

And to give an idea of what Costco school looks like in terms of grocery sales, and I combine here because they have two items. They have like I think it's fresh produce and then foods and sun dries. I kind of just put the two together because that in my mind just represents groceries. So between 2020 and 2022, grocery sales have increased 25 percent in total as a percentage of total sales it represents 52 percent in 2022 that's compared to 56 in 2020 however i think it's important to understand because i know in canada we had um i don't know if you remember dad there were some lockdowns where cost Costco and other big box store were only able to open, but they had to like cordon off sections and only the essential stuff was allowed to be bought, like groceries, for example. So I think, you know, the fact that it's decreased a little bit, that may be one of the reasons.

But still, 50% plus of their sales being grocery. That's pretty impressive. And for 2022, they did $150 billion in grocery sales. So really, really impressive. And I think it will really give them an edge in terms of kind of being able to not seeing a slowdown in sales for this year or potentially next year compared to other retailers like i'll be uh talking about a bit later you just sent me down a ptsd inducing memory lane where like they had this some of the stuff blocked oh yeah which never made any sense to me i'm like wait you're gonna funnel more people in a smaller area well like i'm not i'm no scientist, but something may end up here. Dude, the Walmart-Costco thing you're talking about here too is like, yes, the grocery, but these are retailers that actually compete on price. They compete on low gross margins.

And that is what is so compelling for the business. And it keeps them so insulated from the broader economy. Yeah, exactly. And the reason why we talk so much about membership fees for Costco, it's because their margins are so low on what they sell that essentially almost all that membership fee revenue goes down to the bottom line. So I think that's why we kind of harp on that quite a bit because the margins are so low. So it's good. They have a great volume, but it won't necessarily translate to crazy profits where they really get it as those membership fees. Yeah. For context, Costco usually has like between 10 and 12% gross margins, which is about half of other retailers.

Like a Walmart's are like a 23 to 25. I don't know what it is on a trailing 12, but those are the rules of thumb typically when you're comparing these businesses. So that is a gigantically different business model. I, Simone, I was last week, i was about as close as you can get to buying costco shares like i had the limit order ready i was sitting on my computer i've never come this close to buying shares of a stock and like bitched out i i as i do, if I'm not feeling the valuation, and I've been saying that for way too long, sitting on my hands, I'm like, I'm doing it. I'm buying Costco. It's happening. advice there. It's probably going to be the wrong decision as it has been for the last 10 years by not buying shares, but you have to operate with some rules and patience or else you're going to end up with a whole basket of stocks. No, yeah, definitely. I mean, it's not, I think the only thing that I don't like from Costco is the valuation. Everything else.

It's the only thing. It's the only thing and i mean there's a good reason it has a premium but i mean it's it will it trades at that price because it's the only thing wrong with the yeah there's hardly any bare case on it but the issue is such a high premium it also doesn't give you much margin for error if something does go wrong. And clearly it hasn't in the past, you know, however long, but still remains that there could go that something that goes wrong. And then you ended up paying too much for the business. I'm not saying it will. It's just it doesn't give you much margin for error. Yeah.

Like my thing is try not to overpay. And it's hard to say I'm not when you own Costco shares. All right, let's talk about Live Nation, ticker LYV, the owner of, you know, most people are familiar with them owning Ticketmaster as their kind of crown jewel of an asset. Now, wow, these results were kind of nuts. 2022 was quite the rebound. And it's in line with what we've seen discussing the travel and experiences market, the booking holdings, the Airbnbs. When you compare it to 2019, many of these businesses have not only renewed demand in such a major way, which shouldn't come as a surprise,

but actually seeing record, record demand far in excess of what we had seen in 2019. And so sure, there's some pulled forward growth, but I think there's also a change in sentiment around the consumer and experiences. For the concert segment, it was, so let's just back up a bit here. In 2019, the concert segment did nine and a half billion in sales on the top line. In 2020, this fell to just one and a half billion. So that probably just covered like January and February-ish when everything shut down. It was like, you know, Feb 20th, roughly. And so you basically captured that. And then the business went to complete ghost mode, try not to die over the next 18 months. They just reported 13.5 billion in concert revenues for 2022. So this represents a 43% jump in concert revenues and a record 121

million concert goers in the year. So overall revenues are up 44%. So very in line with that concert line because it is the majority of the business. And back to real gap profits as well. This is another stock where the adjustments are just like, wow, okay. Footnotes, footnotes. Stock is looking fairly attractive here at surface level. It's on my watch list today. I do think it is a great business. I do think Ticketmaster is a real toll road of a business. But I got to dig into the financials. It's a difficult one to grasp. The margin profile is confusing. The net margins are essentially terrible and adjustment after adjustment. So look no further than my discussion about GFL last week. And rule one as an investor

for me is knowledge and willingness to understand the business. So I'm not quite there yet. That's why it sits on my watch list, but it's looking pretty interesting. Yeah. Outlook. Go ahead. Yeah. No, my, my issue with them has always been, you know, they do have sometimes some questionable practices in terms of, you know, what they'll do. Um, and I think that's always going to be a risk for them in terms of potential regulatory risk right so i think that's that's one issue there but uh i mean it's a good business obviously because you know they i think they own some stadiums too right right out right yeah the way the network and infrastructure do they have built to dominate large events as being like the only name in town for it is quite fascinating.

And I was reading this blog post done by the guys at Baskin here in Toronto. guys at Baskin here in Toronto, they wrote a piece about how misunderstood the fees are for Ticketmaster and why they have to charge it. And I think that they need to do some better PR about what goes in there because you can't not buy a ticket, look at the fees that Ticketmaster is collecting and just shake your head as you enter in your credit card information anyways. Looking into 2023, they're expecting still really strong demand for concerts and events, event-related deferred revenue at $2.7 billion to start the year, up $400 million, just looking out as of mid-February versus 2022. They think that concert ticket sales are going to be up 20%, international up 25%,

strong fee-bearing gross transactions on ticketing and sponsorship commitments up double digits. And so I think, and again, I do not have real statistical anything to back this up beyond my own anecdotal opinion. And I'm curious on your opinion as well. I do think there is a large seismic secular shift to experiences, concerts, going and doing things beyond one, just going to bars. Drinking is on the decline. We just saw that alcohol sales in Canada have reached like multi-decade sales lows. I'll talk on that on next Thursday's episode. Many, many reports are coming out that North America Gen Zs are not drinking as much. And so what are they going to go do? They got to go do things. They got to go, you know, you can't just, hey bud, hey, bud, let's hop over and go crush eight pints. People are still going to do that. But there's this growing demand for doing actual events. And it's coming out a bit in the data here and prioritizing trips and experiences in this next generation i think that's a long secular trend that you know the airbnbs and the live nations of the world are

going to really benefit from yeah i mean i guess people will go to a concert and smoke weed instead of drinking alcohol exactly yeah yeah totally no but i agree that. I think what we saw was 2020, 2021 with the lockdowns, obviously limited opportunity to travel or go to concerts, especially in Canada, but also Europe, the US. I think it really depended what state you were in. One, because, you know, you bought new furniture because you couldn't really leave your home or you bought a sea dew because you have a cottage and you're not going to be traveling or going to a concert. So might as well enjoy something new. I bought bikes and so on. Right. So people really shifted to goods because, you know, that's the only thing or they had a limited opportunities to spend their money. And now I think it's really shifting, like you said, to experiences and Expedia. i think it's really shifting like you said

to experiences and expedia i think it's expedia has a really good commercial but basically it says something to the effect that you know oh you're gonna spend to buy this in 20 years you're not gonna remember this you're gonna remember the trip you went on and i mean that i'm butchering it a little bit but that's the essence of it and i think it's a pretty accurate commercial to be honest yeah i think that that messaging is really resonating with this next generation what we'll call the gen z's and the data has come out uh you know there's so many reports they're not uh they don't want to do the same things that previous generations have

done. This is normal. This happens every time. And one thing that I noticed is that they're not drinking as much, contrary to what I may have thought. So very interesting data. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself,

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

in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, Blossom Social in the app store and I'll see you there. By the way, for those listening, it's Canadian investing show. So people are going to be curious about the bank earnings. You got to stay tuned at the end.

Simone is also, I didn't mention this at the top of the show. Simone's going to do a roundup of Canadian bank earnings as well. But before then, let's talk retail. Yeah. So like I said earlier, there's been some really weak retail guidance and it's not just anecdotal. It's pretty major retailers here that are providing some weak guidance for 2023. Like I mentioned, we talked about Nordstrom. Clearly, it's a clothing retailer there or a department store. But Walmart is probably the Walmart and Costco are the two that are actually providing some. Well, Costco is not providing guidance,

but I assume it'll probably be similar in range to Walmart. So Walmart, they're saying 2.5% to 3% sales increase for 2023, a decrease in adjusted earnings per share of 5% in the mid-range. So you're clearly seeing still some impact with higher costs for Walmart. It's kind of a lukewarm guidance here. But clearly the grocery is making a big difference because if you compare that to Target, or I know some people like to call it Target because it's a slightly classier Walmart, I guess. But their 2023 guidance sells to either decline in the low single digits or increase in the low single digits. So pretty stark, you know, not great guidance here.

The earnings per share increase of 38% in the mid range. However, Target had a disastrous 2021, like really, really bad 2021. So their increase is still the EPS, not back to the level they had 2020 or 2019 so I think you have to take that into account so not great guidance for Target. Home Depot you can pretty much include Lowe's I think Lowe's guidance was pretty similar to that but I don't have it here. Sales growth and comparable sales to be flat in 2023 compared to last year. Earnings per share to decline in the mid single digits, operating margins to be approximately 14.5%, which would be a 80 basis point decline. As a side note, they are increasing employee

compensation by 1 billion. I think they really want to put emphasis on having good employees that are able to provide, you know, actually good service because a lot of people go to Home Depot and, you know, myself included, I don't really know sometimes what I'm looking for, what I need, and I need someone. And it's really helpful when I have someone that actually knows what they're talking about and can point me to the right direction. And Home Depot, for the most part, has done a pretty good job for that. And like I said earlier, I think Walmart and Costco will probably be some outliers there because the grocery business will definitely help them grow their sales, not by a lot, but a little bit and really encourage people to go to their stores.

But other retailers, and these are just a few. But if you kind of look across, there's a lot of retailers that are projecting some slowing sales for 2023. And a lot of that is actually due to some pretty poor Q4 numbers. So if you're interested in retailers, this may be an opportunity if you think it's more short term. Some of them, it may be a bit more dire, but just something to keep in mind that 2023 will probably be a bit rougher year compared to the last few years. Dude, when you're in Home Depot and you go up to the, they got that, the orange aprons, you know, they got those orange aprons. It smells fantastic in there. You know, you can smell some fresh two by fours and like rubber on, on the floor. And you walk up to there with your

tail between your legs. Cause you're like, dude, I have a question that I should know. Like you like have to like hand in your man card to the guy for like a little bit. And he doesn't give it back to you till, till the end end of the conversation because like you're asking like such a basic question um i love the employees there they're very helpful uh there's a good culture there clearly and uh shelling out one billion in employee compensation is probably not too bad of an idea yeah yeah it's definitely i think a smart move and the last one i didn't add to my notes, but I know Best Buy is also projecting a decline in sale. So it's clearly like not an outlier. It seems that it's pretty consistent.

Obviously, there's going to be some outliers that will do well. But I think retail, we're starting to see a picture that retail is going to see a slowdown in 2023. Let's talk about tech into ituit, ticker Intuit. More positive news, I guess. Yeah, more positive news. You're probably seeing lots of Intuit ads these days with tax season. The software company of their four main assets, TurboTax, Credit Karma, QuickBooks, and now MailChimp, They reported their Q2 of fiscal 23. So a bit of an interesting operating schedule there.

Thank them for it because they always give us news. All right. So there's the Canadian investor podcast drinking game, which we need to make the rules of one of these days. And every time I say QuickBooks is a beast on this podcast, drink. And drink now because QuickBooks is a beast. This is one of those businesses where it's like, yeah, sure. TurboTax, Credit Karma, MailChimp, pretty good businesses, great assets in this now conglomerate of software companies that are all operating in like similarly tangential

spaces and really helping the small business is like kind of their key. But QuickBooks, brother, you know how I just say the corporate world is glued together by Excel spreadsheets? Well, the small to medium sized businesses is just glued together by QuickBooks. Say what you want about the product. I think it's actually pretty solid. You and I use it for the podcast, this business that we run. I use it for Stratosphere and MailChimp as well. So Intuit shareholders, you're welcome. I shell out tons of money to them every year. And I pay my employees on there as well on QuickBooks. It's just already equipped with payroll and like

HR as a service. So it's a no brainer for them to kind of tangentially tag on services and have users spend more and more money every year, just like I do. And it's really QuickBooks in particular has nailed this two sided network effect effect because your accountant, your bookkeepers are going to be familiar with it. You're familiar with it. It's got that two-sided network effect that I love. And I really should have bought the stock five years ago when I had realization that there's something special here. But maybe the second best time is now. If you can justify the price, because this is not a cheap stock. It's one of those beautiful free cash flow per share compounders and ridiculously high margins and high network and switching costs. So the result is this is not a cheap stock. I'll make this quick

because it's just Q2. It's not full year guidance. And we're going to do Canadian banks after this. Revenue is up 14%. So mid double digits. Earnings per share a whopping 42% year over year increase already what was a monster comp such a wonderful asset arguably one of the most sticky assets super profitable and what's not to love so um this is one of those like gems within a gem of a business, and Intuit is truly a high-quality compounder at this point. Yeah, and you can tell the markets see it that way too because today tech is getting crushed because good old Jerome is making some hawkish comments about them thinking.

Yeah, he did something at like 10 o'clock yeah he basically said that um they now think interest rates will have to be higher than they originally anticipated and pretty much everything that's more risk on like growth stocks have been hit pretty hard today but into it is actually you know it's down 0.8%, which is really good for I kind of still have a tech company. It's really shows that the market thinks that regardless of the macro environment, Intuit should be able to do well. Yeah, like Microsoft's down double that, for instance, and Microsoft's a utility at this point. So that gives you some useful context. You know what also is barely down? Good old Constellation Software. It seems to be

the most resilient of stocks around. Thank goodness for that. Yeah. And we will be talking about them in a future episode because we had an interesting question about why I'm not owning Constellation Software. So people who want to hear about that, we'll touch on that a future episode. Now, like Brayden said, Canadian bank earnings. I'll touch, I try to kind of mix it up a little bit when we do Canadian bank earnings, not always doing like the same ones.

I also don't want to do all six or seven of them or I think it's seven now, the big banks. So I think three kind of gives us a good gauge. I'll touch on CIBC, BMO and Bank of Nova Scotia. I won't go into great details here, but I'll look at the loan loss provisions and net interest margins. For those not familiar, if we have some new listeners, because I think this is the first time I do it in 2023. I think so. Yep. Yeah. Yeah. Okay. I don't know don't know you know that brain i kind of forget but um so it's a giant time warp anyways it's all

good yeah exactly so loan loss provisions also you'll hear provisions for credit losses same thing it's essentially a bank or financial institution that's putting money aside for in the event because they think that they may have people not paying their loans to them. So they're putting provisions aside for that. So that's a really important metric right now because as interest rates are going up, you know, economy is slowing down a bit. economy is slowing down a bit that kind of perfect storm if you'd like should result in some more people not being able to pay their loans so the the money they're actually setting aside is actually a good indication on where the banks think this is going so i'll start with bmo so adjusted earning per share was down 17 to 3.22 versus the same period last year. I normally don't look at adjusted net earnings, but in this case, I think it was appropriate. That's because it adjusted for the

acquisition of Bank of the West in the US and the associated costs with the transaction. So I think it would have just really skewed. It would have been lower and you know people may have seen that and just panic thinking BMO is down the gutter it's not the case so I thought it was justified here they set aside 217 million for loan loss provisions that's following a 226 million in Q4 2022 and that's in contrast with a release of 99 million in Q1 of 2022. So they'll release those loan loss provisions when they think they no longer need them. So we're seeing kind of the shift here in banks, the net interest margin. So that's pretty, pretty simple. The net interest margin is just a difference between what they would pay people have money in accounts with the bank in terms of interest versus what they loaned out.

So it's the average spread between the two. It's one of the main ways that banks make money. And it's a key metric whenever you're looking at banks. So net interest margin was $1.48% compared with $1.46% in Q4 of 2022, but $1.46% in Q4 of 2022, but 1.71% in Q3 of 2022. And this will be kind of a theme here is that we're seeing this net interest margin kind of go down in the last couple of quarters. And aside from the last two quarters, the lowest it had been since 2020 was 1.57. So you're seeing, you know, again, I think that Canadian banks are in good health generally, but you're definitely seeing some headwinds appear. CIBC Q1 of 2023. So earnings per share was down 69% to 39 cents. Loan loss provisions were $295 million. And for context here, they had $1.05 billion in provisions last year and $158 million in 2021.

So you're really seeing them putting a lot of money towards those loan loss provisions in the past year. Net interest margins of 1.49%. That's compared to 1.51% in Q4 of 2022. compared to 1.51 in Q4 of 2022. And the net interest margin is down about 10 basis point versus what it was in Q1 of 2021 and Q3 of 2022. So slightly lower there. And the issue with CIBC has always been, from my perspective, and you can add in your thoughts here, is I posted this on Twitter as well, is, you know, In their investor presentation, they actually do a pretty good job of showing it, but they always have a credit portfolio breakdown. And the real estate lending is 55% of their total loan portfolio. It's actually trended up a little bit. Last time I

checked, it was around 53%. Now, a lot of these are insured, you know, insurance from the CHMC, for example. There are some private insurers as well. But they do have a pretty substantial amount of uninsured mortgages as well. The good thing is the uninsured mortgages are loaned to value of about 50% or a bit less. are loan to value of about 50% or a bit less. But those uninsured mortgages, if people default on them, it's never a good thing for the bank because then they have to take over and sell it and try to recoup their money. So this is definitely one of the banks where I'm definitely the most reluctant to touch them and Bank of Nova Scotia are the two that I would be very reluctant. I don't know what your thoughts are on that. Those are the two I would also have the least

preference to own, probably in that order. lending. So more than half the loan mix. And I mean, they're just so concentrated in Canadian housing, whereas the other banks have done a pretty good job over the last decade or so to have opportunities outside of these borders and not just loaning money. Um, like if you look at what TD and, and, and RBC and national bank deserve some credit to, um, what those, what those businesses have done, um, dude, even BMO. Yeah. Yeah. So I, Dude. Even BMO. Yeah.

Yeah. So I, you know, you're a kid. You don't decide who your bank is, right? Like, you don't decide what your name is when you're born. You don't decide where you were born. And you also don't decide who you bank with because your parents decide for you. I can't wait to switch from CIBC. It's unbelievable how the stuff just doesn't work. Now that the EQ Bank card is out,

I am now literally not using it. I'm not using my bank like I used to. I'm completely on EQ Bank right now. And that was already happening for me. So dude, the big banks, like they just irk me. Yeah, just the fees. I'm so happy. I'm so happy not only EQ's a sponsor here,

but like I would be pumping them regardless because it's legitimately true. Yeah. And just one last thing here on CIBC is another alarming thing to me, at least a total variable rate mortgage portfolio with fixed payments still, but you know, still variable rate. It's 38% of their Canadian mortgage portfolio. So that's, I mean, just kind of projecting numbers. That's probably around like 20%, I would say, of their total loan value is variable rate mortgage portfolio with fixed payments. So it's still variable rates. It's just the payments are fixed. So oftentimes what they'll do is they'll just extend the amortization. Or if they hit their trigger rate, I think they'll have to increase it.

So it's, I mean, yeah, I'll just leave it at that. I know people get attracted for the yield for CIBC, but there's definitely some alarming things. And personally, I would look at some of the other banks. Now, the last one here is Bank of Nova Scotia. I'll go quickly on here. So EPS down 36% to $1.36. Loan loss provisions of $638 million. That was compared $529 million in Q4 of 2022 and $222 million in Q1 of

2022. Net interest margin of 2.11%, which is significantly higher than the two other banks. But it's been trending down a little bit. And I think what really makes it higher for Bank of Nova Scotia is their Latin America operation. Because I was looking and you know, one thing that you can look when you look at banks is their supplemental information is actually really useful. So they'll break down the segments, they'll break down the net interest margin, for example, for their different segments and all the revenues. And there's a lot of data, some of this stuff you may not fully understand. I know I don't all the time because banks can be quite complicated. But one of the biggest risks for Bank of Nova Scotia is really their Latin

America operations. So that is a risk, something to keep in mind. I know they have a new CEO who is looking to review their full operations as a whole. So it'll be interested what kind of happens in the next year or so, whether they try to divest parts of the business or I don't know exactly what they're looking at, but they are doing a strategic

review um so that's just uh yeah the overview of bank of nova scotia here yeah i see them i saw them all over latin america and central america um which was shocking to me because i didn't know that was there um have you seen i mean it's not a huge economy. Cambodia's largest and fastest growing bank is owned by National. It's called ABA Bank. ABA Bank, let me just confirm that. Yeah, ABA Bank. They are everywhere in cambodia which is you know a fast growing super undeveloped economy in uh in uh in southeast asia so national bank if i had to pick uh a big bank would be the one that i'd be

particularly interested in but i don't know if i'm interested in the smallest of the big ones I'd be particularly interested in, but I don't know if I'm interested in any of the banks. The smallest of the big ones. Smallest of the big ones. I don't know. They just seem to be doing good things. And I think they've also been a leader in performance. Yeah. No, they've done pretty well overall.

Yeah, I think for me it would probably be that, knowing that with a caveat that I'm not, not, and emphasis, not a bank expert or, you know, an expert on evaluating banks. I know my way around decently well. But yeah, for me, it would be like you just said, national bank and potentially either, you know, TD, BMO or Royal Bank. Just because I like the diversification different for all three, but I do like the diversification they represent. Come join the EQ Bank shareholder squad. I have quadrupled my money on the stock at this point. I think more, actually, if you include my yield on cost, too. Shareholder, happy customer.

Thank you to the friends that you can make um that does it for today's episode simone good stuff uh let's uh let's record another one how about it let's record another one the back-to-backs baby uh thank you so much to listening to the pod we appreciate you uh dearly and uh if you haven't gone over and smashed that follow or subscribe button on your podcast player. So if you're on Apple Podcasts, scroll to the top, hit the subscribe or the follow button on Spotify. That way when they come out on Mondays and Thursdays, they're right in your podcast player. We will see your beautiful faces in a couple of days. Take care. Bye-bye.

The Canadian Investor Podcast should not be taken as investment or financial advice. Take care. Bye-bye.