The Canadian Investor - Will Aritzia be Able to Return to Growth?

Episode Date: October 5, 2023

Simon is joined by Dan Kent from stocktrades.ca to go over the recent earnings and news. During the episode, Simon and Dan discuss the latest earnings from Aritzia and Costco. They also discuss the ongoing negotiations between the unionized auto workers and the Big 3 US car makers. Symbols of stocks discussed: F, ATZ.TO, GM, COST, PLC.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  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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We have some good rapport. For those of you who are not familiar with Dan, he's definitely pretty well known in the Canadian stock investing community. So Dan, you want to give people a little overview, kind of a 30 second elevator pitch of what you do? Yeah, sure. First off, hey, everybody. Glad to be on here. My name, Dan Kent. I run stocktrades.ca. We're one of the larger financial websites in Canada, primarily focusing on Canadian stocks, Canadian ETFs in terms of research, market strategies, market commentary, all that kind of stuff. We started the website in 2016 and we have been doing it ever since.

Me and Dylan, both of the co-founders, left our jobs in 2020 and have been working on it full-time ever since. Yeah, that's great. Well, welcome. You know, welcome to the Canadian Investor, Dan. Pretty excited to do that with you. So today we'll be talking earnings and news. I saw what you did in terms of note looks pretty good, especially since we're kind of in between earnings seasons, So it's not the most eventful, but we'll get started here and talk Aritzia because that is one of the companies that recently reported, I believe it was last week. And just so people know, you do own shares of Aritzia. So I think it'll be good to get your perspective on that.

Is it a big position for you out of curiosity or? No, it's only I'm actually in the midst right now of moving my portfolio from QTrade to Wealthsimple. So I actually don't know the exact allocation, but it's probably one and a half, two percent. It's not a massive position for me. I've actually been in and out of the company quite a bit over the last three, four years. Okay. So yeah, it'll be great to get your insight here. So obviously I follow this company like a little bit just because we do talk about it. I know there's a lot of people that own it, listen to this podcast. And I know the management from Q1 2024. So their earnings season is a bit different or their financial year is a bit different than other companies that we cover. But they had guidance. I would say their guidance wasn't great last quarter. So I think it's important just to keep that into context.

But it kind of fell with what they were guiding, but still not good. Revenues increased 1.6%. However, comparable sales growth declined 4.3%. And I'll add some Lululemon comparables here because a lot of people want to compare the two, even though I think there are some big differences here, mainly I think because they're both Canadian fashion or apparel companies. But if you compare with Lululemon, they released earnings about a month ago, they saw their sales increase 18% and comparable sales 11%. So big difference here. Obviously, different stages of their growth in terms of Ritzia really putting a lot of money

into expanding, especially in the US. Gross profit margins were down 690 basis point to 35%. I know that sounds pretty bad, but it's actually better than they had guided. They had guided a decline of 750 basis points. And that's compared to Lululemon, which has 58.8% gross margins. And that was a 230 basis point increase in their last quarter. Operating margins were down really significantly here, 960 basis point to 2.6%. So barely any margins there. This is the one that I find a bit more alarming just because it just includes more expenses than gross profit margins. Don't get me wrong. Gross profit margins are really important metric to look at. And that compares to 21.7% for Lululemon, their latest quarter, which was an 80 basis point increase. And then just to finish off here, their earnings per share was a negative 5 cents per share compared to 40 cents last year. And

they were free cash flow negative for the quarter. But so far this fiscal year, they are faring better compared to last year from a free cash flow perspective. They've lost 65 million on a free cash flow basis compared to 101 million last year. So, you know, not great overall. Dan, do you have some thoughts here before I kind of continue and just give a quote of what the SEO had to say? Yeah, I think in regards, especially to the comparisons with Lululemon, like I think a lot of the issues right now with Aritzia, I think we're going to talk about this is the issues they're having with inventory, which is it was kind of a, if you give them the benefit of doubt, a prudent decision in 2022 to stock up on inventory,

which is kind of like biting them a bit right now. But in terms of the cash, I guess the free cash flow as well, just cash on hand kind of stayed steady on the quarter, but they're actually spending quite a bit of money because it included a $100 million drawdown on a credit facility as well. So they're spending, I mean, there's a lot of upfront costs to opening up these boutiques and everything. They don't see an immediate realized return. So, but most of what is plaguing it right now is definitely inventory. Yeah. And on that, I mean, I did bring up some data for inventory and, you know, to their defense, it's been pretty hard for a lot of businesses planning like during the pandemic and afterwards.

I'm into mountain bike a lot. I know it's completely different industry, but still you saw a lot of companies having struggling with keeping up with demand during the 2020-21. So what a lot of them did, they overordered thinking that would kind of continue going forward. And now they're having to discount stuff pretty heavily i mean just mountain bikes because i know that more i mean you're seeing pretty regularly 20 to 40 percent off at this point because they need to get rid of it yeah it's uh i mean and obviously this inventory is going to hit margins too because you know it costs money to store this stuff you know we saw ritzy's inventory like two

and a half x i think from uh the start of 22 to the end of 2022 it's normalized a bit now but you know it's pretty clear uh inventory makes up 75 percent of their liquid assets right now whereas a company like lululemon i think they they're like sub 50%. So the company, you know, what they thought was supposedly going to be a prudent move by stocking up on this inventory, they got hit with pretty much falling demand. And now you're probably looking at markdowns. Eventually, you know, this inventory does cost excess capital to keep. So they're going to end up having to mark the product down unless demand all of a sudden returns and they can move it. But I mean, it doesn't really look so considering the current environment. Yeah. Yeah, no, I agree with you. And it's really hard with fashion too, right? To not have to discount stuff because I'm not a women's fashion

expert, but I do know that stuff doesn't necessarily stay in for that long. So you have to also take that into account. And I thought Jennifer Wong, who's been CEO, how long has she been CEO for? Like a year, right? Something like that. It's pretty recent. She was in the company for a while though. Yeah, she's been in the company forever, but I think she took over. I mean, I would say maximum like 18 months ago. It was last year at some point for sure, I think. Yeah, okay. No, that's what I thought. And she had a really, I think, interesting quote.

So I'll just quote what she was saying. As we highlighted last quarter, we believe our top line trend is being impacted by missed opportunities and the level of new styles in our product assortment as well as a mixed consumer environment. in our product assortment, as well as a mixed consumer environment. So clearly here, the mixed consumer environment, I think that's more related a bit more to macro and shifting kind of consumer spend in terms of what I find a little worrying here is the missed opportunities in the level of new styles. And I know they talked about that last quarter, but that's something if I were to own the shares, I would definitely keep an eye on because fashion is a hard business.

There's only a couple of businesses in my mind that can really stand the test of time that we've seen them do it over and over and again. I think Lululemon is starting to enter that category because they've been around for so long and have seen cycle. But I think one that comes to mind is Nike. They've been around forever and I think they've done quite well. But like you were mentioning, I think the inventory is worth looking at because the inventory turnover ratio has been getting worse and worse.

The inventory turnover, for those not familiar, it's a metric that looks at the cost of goods sold versus the average inventory level for a given time period typically done on a yearly basis and it peaked for eritsea at six in 2018 and now it's below three it's not that in itself it's not necessarily the most alarming because that is actually a bit better than what Lululemon is looking at right now. But I suspect it might change since it's backward looking and Lululemon has fared much better this year, at least in recent quarters than Aritzia. So that's kind of my general take. The stock popped pretty big time on the earnings release, but now it's almost back to the pre-earnings level. Aside from that,

Dan, anything else you wanted to add about Aritzia, things you're considering looking at? I mean, I guess I would just say on the inventory turnover level, I look back at when Lululemon started publicly trading as well, and it was very similar. I mean, inventory turnover spiked up massively when they first started, probably because there was so much turnover due to the popularity of the brand. And then at some point, they either get their supply chain issues fixed, normalize their inventory, and those ratios will probably gradually trend downwards. And I think in this case, now you're seeing Lululemon, or sorry, Aritzia built up, you know, $510 million in inventory, and it's probably going to impact that ratio moving forward. But no, I don't, I don't have any other comments. Inventory has normalized a bit. Like over the last two, three quarters, I think, you know, they were posting like 100% increases in inventory every single quarter. And now I think the last two quarters, last quarter was like a double digit increase, 10% increase in inventories. So it's normalized a bit. I mean, you can clearly tell from the inventory chart where the company

did just go all out. And, you know, as per the company itself, it was in an effort to stop, you know, essentially being out of stock on a ton of items because popularity was gaining so much during the pandemic. So I think it was just kind of a situation of just bad timing. Yeah, no, I think so. And I mean, just like you were saying, so inventory really, I think it leveled off maybe like five quarters. I mean, it kind of peaked around five quarters ago, and then it's been pretty consistent since a little bit up and down. So I think, you know, I definitely agree with you. And in terms of, you know, what are you doing as a shareholder? Are you

looking to sell, add you to your position? I know, obviously, it's not investment advice here, but are you kind of playing it quarter by quarter kind of keep it a close eye and see that you know things are hopefully turning around and playing out like management is saying it will yeah i mean i'll definitely be keeping a close eye on it i have no intentions to sell it now i mean i've i entered the retail space for the first time quite a while ago with canada goose and i ended up riding that one way up to the top as well and kind of, you know, got a little complacent. And then they took a huge hit from COVID and the same thing, like just anything in terms of like brand damage or anything with a retailer, you know, rising inventories,

eating away at margins, like there's big risks in these companies. So I would never take a massive, massive position in a small cap retailer. But I'm definitely not giving up on this company right now. Because clearly, like, you can see from the trend in inventory that this was in an effort to stave off, you know, the rush of demand during the pandemic. I don't necessarily think it's rising inventories due to a lack of demand. Demand is definitely going to slow because of just the environment, but I don't really think that's anything the company could have done to prevent. So I continue to hold it. I don't have any plans to sell. Okay. No, that's good to know.

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. 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. 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. full disclaimers and more information. Speaking of retail, we'll go in, I guess, big box retail with Costco earnings. So do you want to lead that one?

Yeah, sure. So on the fourth quarter, they topped earnings and revenue expectations by low single digits, pretty much came in what was expected, high single digit revenue growth and double digit earnings growth when we compare it to the last quarter of last year. And the one notable thing when we look at comparable sales that exclude gas and Forex, just because they, you know, these could have large swings on these numbers. So they tend to exclude them. Canada had 8.1% comparable sales growth, which is nearly double that of the United States. It's pretty difficult to like kind of know why comparable sales were up in Canada by so much. I would guess it's just overall the costs of living here in Canada are so much greater,

the elevated costs rather than the United States, simply because of mortgage costs, food costs, all that. I mean, I used to be a pretty big Sobe shopper and I have pretty much migrated to an exclusive Costco shopping. I don't go anywhere else now. If I need some small items, I'll go to a No Frills or something. But I went into a Sobe's a few days ago and it was like 92 bucks for two bags of groceries. So like probably the last trip I'll make into so many for quite some time. So I think like, I think Canadians are feeling cost of living pressures more than maybe

internationally and in the United States. And that's why like, that's a big increase in comparable sales growth. Like the United States was 4.2 and Canada was 8.1%. So it's pretty notable. I think Canadians are taking advantage of Costco pricing for sure. Full year, they were $242 billion in revenue, which topped expectations. Earnings came in just a bit shy. And gross margin increased by 42 basis points, excluding gas, 16 basis points.

And they pretty much said the opposite of Aritzia. Margins rose because of a better position in terms of inventory relative to last year. So they didn't need to mark down as much product. They're seeing obviously big declines in big ticket items. People just aren't really shopping for those large scale items that Costco typically offers. I can't think of one right now. I mean, maybe even home improvement projects, like they sell air conditioners, things like that. Renewal rates. This is pretty key as like the membership drives most of their profit. They don't, they have pretty thin margins on their groceries. So they kind of rely on things like memberships. Renewal stood at 90.4%.

That's total. It was 92.7% in Canada and the United States, which actually shrunk year over year. But the one thing is, on the year, the company, they opened up quite a few international stores over the past while. And the one thing about the international stores, possibly where there isn't much Costco exposure, typically what will happen is they'll get a massive influx of new members that the company themselves kind of calls looky-loos. They'll sign up for a year and then they won't renew. They actually say that renewal rates can be in these international stores where they don't have much exposure. They can be as low as 50% after the first year and might take, you know,

three, four years to normalize to that 90% range. So the more international stores they open, the more pressure, especially in the first few years, will probably be put on these global rates. When in reality, I mean, they're still very strong in Canada and the United States. I mean, 92.7% is crazy. And they do say that, you know, they'll trend over the long term back to that 90% range. And I mean, when we look at the fact that I think the company had about $6.3 billion in net income last year and memberships hauled in, I think, $4.6, $4.7 billion in revenue. So it's a pretty notable thing that they continue on with revenue growth. I know that in terms of like new store openings, I think in North America, that kind of influx of members really wouldn't be as big of a hit as international. Like if they open another Costco in Calgary, I don't think they would get that huge influx of new members.

So you would probably see more maintained renewal rates if they're opening more stores. I don't know. With all the interprovincial migration going to stores in i don't know with all uh the uh interprovincial migration going to alberta i i don't know maybe yeah i get it for calgary um but i wanted to add something so for our joint tci subscribers so it's quite interesting since 2012 they almost doubled their total card holders so they had about 67 million, I think in 2012. And now you're looking upwards of 120 million total cardholders since then. So it's just been a kind of very nice, steady increase almost on a year to year for Costco. And it's interesting that you said big ticket items

are not as you know, in or being purchased as much by consumers because that's essentially the same thing that Canadian Tires said I know they're more Canada focused but also the same thing that Walmart said same thing that Target said so on the retail space I think you're really seeing that shift in consumer spend and I know I'm just kind of like you now Costco you know it's always freaking busy going to Costco and I'm not always the biggest fan to go but um I we try to go every three to four weeks and uh we'll still go to local grocery stores for smaller items but definitely like once a month and it always costs about like 700 bucks because we're a family of three but we we have, you know, enough toilet paper for, you know, the quarter and, and all the other stuff that doesn't go back. Pretty much. Yeah. Yeah. I mean, they're like their executive business model is just it's

genius as well, because you tend to spend more there because you get that added cashback, like even on gasoline. I mean, you go there, you're already saving, you know, 10 cents a liter, which already incentivizes people to fill up there. But then if you have an executive membership, you save an additional 3%, which at, you know, I went to BC over the weekend and it was like $1.89 for fuel. So, I mean, you fuel up at Costco, you're saving that initial plus the cashback. I mean, it's pretty notable. And on top of the overall cardholders, over the last year, they saw 8% growth in new members, but only 3% growth in new stores. So there's definitely some organic growth there in terms of people probably going to these smaller retailers and realizing like, this is absolutely ridiculous.

The price is here and they're trying out a year at Costco. And I mean, it's pretty hard to not justify that. What is it? $60 for a basic membership. I mean, often you'll pay that in one visit in terms of overall savings. So when are they increasing that membership fee then? What's your best guess on that because they're definitely that i've been saying that target range yeah yeah exactly because usually it's five to six years right that's kind of 2017 i think was the last time i i don't think

they're gonna raise it now like i just don't know how well that would go over i mean i think they could i don't think they would have any ill effects from raising it. But they, they just have remained kind of quiet, but they did say it was a when not if obviously they are going to raise it eventually. But yeah, like an interesting note too, I had noted in here the gold bars. Like that's just kind of a cool story. I heard that too. Yeah. It's absolutely ridiculous. Like the demand is so high. you can only buy one gold bar every seven days and you can only buy two per membership. And then they put them online and they're gone in a few hours.

But I heard they're selling them almost at like spot price, right? Pretty close to it, right? They're not really taking market because I've – no? No, I think – well, I looked on there the one time. I think they were 2700 for an ounce okay but that would be canadian probably canadian dollars maybe i'm not sure yeah it could be yeah i was reading somewhere where it's really close like there's not much of a markup i think um that was one thing because if people interest in buying gold oftentimes you

can do it i think there's two main ways in canada if you want it to be legitimate um outside of costco i haven't you know looked in costco yet but i know you can buy them through the big banks but also you can go to canadian min directly and buy it but oftentimes it'll be there's going to be like i can't know the exact percentage but definitely a decent premium over the current spot price of gold so you you pay a little bit, definitely a bit of a premium to get it. So I think that's important for people to realize. If ever they're looking to buy gold, you're going to pay more if you want the physical gold. Yeah, I mean, that's pretty much just Costco's business model.

Just raise your margin and sell it to people. It's pretty much what they said about gasoline too. They noted that competitors are just trying to make more per gallon. So strategically, they're just going to try and make less and just rely on volume, which I mean, if you've ever been to a Costco gas station, there's like 80 cars in line every time you go there. It's absolutely crazy. Yeah. The one I go to doesn't have a gas station. It's an older one, but it's always busy. Literally, you have to go when it opens or when it closes.

If not, I mean, I don't know. For me, it's a love-hate relationship because I hate going to Costco because people just park their carts in the middle of the aisle and then you're trying to go. But, you know, in terms of saving money, it's definitely worth it. Anything else to add to Costco before we move on to the next segment here? No, I don't think so. I mean, when you see like just the results generally, like in terms of the valuation, like a lot of people kind of avoid it because it's so expensive.

But I mean, I don't I don't think anything is going to slow them down. If anything, I think they're going to continue to grow with just the rising costs everywhere else. Yeah, no, I agree with you. I mean, people are looking for value. And whether it's people looking at Dollarama, looking for value in smaller packages, or Costco for people who can't afford driving there and buying in bulk, that's what people are looking for. I mean, I get it.

That's what I'm doing. That's what you're looking for. I mean, I get it. That's what I'm doing. That's what you're doing too. So you got to save money somewhere. 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. 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, 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.

Now we'll move on to our next topic here. So we haven't talked about that mostly because I've been doing some guest interviews recently, but the United Auto Workers strike, so the strike in the U.S US with the big three automakers. I wanted to talk about it because it does obviously affect publicly traded companies. In short here, auto workers are looking for significant increases in wage and benefits. From their perspective, they gave major concessions to the big three following the great financial crisis. And, you know, with high inflation and profit rising the

last three decades for the big three, they want their first share. So that's essentially why they're looking to get some significant increases. Definitely, I'll try to look at both sides of the story here, because depending I find, and I don't know if you notice that Dan as well depending on what publication you're reading it tends to be more skewed towards the union or more skewed towards Ford or the big three I mean are you noticing that too that's what I found yeah I was actually reading up on this quite a bit over the last few days it is yeah there's a lot of pro going either way um the one thing i didn't notice uh throughout all the articles though is just the overall costs that this is having on the u.s economy i think they said like in the first few weeks like four billion dollars

and uh like it could even escalate further than that. It's pretty crazy. And they, like, they want a lot of money. Like, a lot of, like, these motor companies operate on pretty low margins already. So, I mean, the pay increases that they want is pretty considerable. Yeah, exactly. And it's so hard because I was texting you. I'm like, like, I'm trying to find what percentage of their cost of goods sold are actually going to labor costs. And it's really, they don't break it down. I mean, I look through the financial statements of Ford, try to find some breakdown.

And unfortunately, they don't really break it. So when you see these estimates, they're usually, I think I saw a Bloomberg article. They're like, you know, speaking with our sources, it would be in this range and stuff like that. It's never super accurate. So I think you have to, I just wanted to know that because it is kind of hard sometimes to get that data. But what's interesting here is that people familiar with this will probably know, but you know, there is a Canadian and American side to these negotiations so in Canada it's Unifor in the U.S. it's the UAW so United Auto Workers and they're using different strategies Unifor represent Canadians auto worker working for the big three and obviously UAW the U.S. workers and Unifor seems to be taking the strategy of getting deals done one by one, whereas the UAW seems to be wanting to make a deal all at once with all three automakers.

Canadian Ford employees have recently, have actually already ratified a deal which will provide them with pay raises, better benefits, better pension. For the pension, it's actually, they'll be looking at changing from defined contribution to defined benefit. I think it's in a couple years that this would take effect. That I find very interesting, because I know the pension world extremely well. And I find that unions are not well educated on pension plans, because there are risks. So defined benefit, people think of that. And I've talked about that before. They view this as a guarantee. So it's a traditional pension where you work a certain amount of years, you get an average of your earnings, and then you get a multiplier and the employer will promise to give you a certain payment based on that when you retire. And the key word here is promise

because promises can be broken. And that's really important. We saw in Canada with some high profile cases, we saw Nortel. We also saw Sears where pensioners or people had accumulated significant pension promises from the companies ended up getting pennies on the dollars because they went to bankruptcy. And then you just become a creditor like anyone else. And then you just become a creditor like anyone else. And there was a bill that was passed Royal Ascent in Canada that would make that will make pensions precede any other creditors. But that has some issues and it only applies to federally regulated industries. reason with those issues is if a company's on the verge or not doing quite well, why would you lend that company money when you know that the pension plan will go before you? So that's one of the big criticism of that. But in the US, I'm not familiar how it's all structured. But I find it very interesting that they're pushing for this defined benefit because it's a big liability for the

companies. And they're not guaranteed at getting the money when they do retire. Whereas the fine contribution, you contribute your employer matches and that account is to your name, they can't touch that money. So that's where I do wonder if the unions actually understand the risk of a defined benefit pension, not to sound the alarm, because some are very well funded. And obviously, you have to look at how well the pension is funded. But you know, it's not like I'm going to bet that automakers, their big three will be fantastic businesses like 10, 15, 20 years from now. I don't know. But what's your thought on that?

In terms of the defined benefit pension, like I'm not a pension expert by any stretch, but I mean, are they more beneficial to the worker over the long term rather than a separate pension? And that's why it must be workers. Yeah, workers perceive that as being more beneficial. Just because it's what's, you know, most people that you talk to that are retired right now, and have a pension will have a defined benefit pension. The Canada Pension Plan is a form of defined benefit pension just backed by the government of Canada. So people perceive that as being better because they know their parents or grandparents. They know people that have these pensions and they love it because they're indexed.

Not all of them are indexed, but some are. Some are conditionally indexed. And they love it because they're indexed. Not all of them are indexed, but some are. Some are conditionally indexed and they think it's better. But with the current, you know, when you factor in the financial situation of certain employers, that's where I think it becomes a bit more risky to have this type of pension, whereas the defined contribution is essentially very similar to an RRSP matching from the employer. So that money goes to you and then you decide what you do and what kind of investments. It's usually locked in, so you can't withdraw it as you want. But that's why I think I'm not sure they fully understand all the risks. They see that as a big win. I personally see it as potentially a win.

We'll see 10, 15, 20 years down the line whether it's really a big win or not. I mean, they're cyclical businesses to begin with. They've tended to be pretty profitable over the last while, I think. I mean, especially during COVID, I'm pretty sure a lot of them posted pretty large profits during the pandemic. I mean, especially especially during i know they had that chip shortage for quite a while and you know i knew some people who had to get vehicles and pretty much the only vehicle you could buy was like an upper end yeah oh yeah the minimum pickup truck you could buy was like 90 000 just because they weren't making you know the stock

ones anymore and for years like the lots were just bare bone dry. But yeah, they definitely made some big profits, especially I would say in the last four or five years. But in the last 10 years, it's been pretty good. Like I'm showing it here to our Join TCR subscribers. I think the best performing one would probably be General Motors because they only had one down year in the last 10 years. Ford, it's been a little, they've been profitable, but more over the place. And Stellantis, which is, you know, the parent company of Fiat Chrysler, they've done fairly well too. It's been a more gradual uptrend for them. So I think obviously that's one of the reasons or

one of the big reasons they're looking for pay raises or pay increases and benefits increases. Yeah. And I mean, when you look to a company like Ford that has, I think it was 170,000 employees, 173,000, according to YCharts. I mean, 40% pay increase. Obviously, this wouldn't be across the board. But, you know, a 40% increase in pay is, is quite notable. I mean, it would no doubt hit the bottom line. And then in combination with this, you have like, there's no doubt going to be a slowdown in auto sales, like moving forward. So you've got this, you've got a slowdown in sales and you probably have this contributing to inflation as well because i mean all these

companies are going to do is turn around and factor it into the price of a vehicle right like over they might not do it immediately but over the long term i mean all it means is higher costs for vehicles which i mean they're already absolutely ridiculous coming out of the pandemic so it's not really yeah yeah and they're and they're not. And what becomes a little tricky here, and I think unions, look, I have nothing against union per se. I've seen, you know, people that were unionized that have done some stuff that should be fireable in my past. I've seen that where the union protects like bad employees. So I do have sometimes a salty taste because I've seen some of the stuff that will happen. But I think it can be a good thing too, if there's, you know,

not a great employer and the union is able to get some better benefits and working conditions for the employees. So I'm definitely in the middle. I'm not for or against unions. I just want people to understand that. But I think they have to thread carefully here because Goldman Sachs, I saw that they did an estimate. And for Ford and GM, it would cost them most likely $4 to $6 billion every year in increased costs if they go ahead with that 40% increase. Again, it's hard to validate these numbers just because they don't really zero out, you know, the labor costs and their costs of goods sold. And then you factor in the potential pension costs, which is can be variable because the employer will typically be responsible for any funding deficiencies within the pension, or at least we'll share it with the employees. So there's a lot of variable costs. And then you add

in some medical costs that they're looking to have better medical benefits the employees. So there's a lot of variable costs. And then you add in some medical costs that they're looking to have better medical benefits for employees. So it's hard to say what the total costs would be, but it would be pretty significant. And when you're looking at the big three, let's not forget that they're competing with Japanese automakers, like obviously Toyota, I'm thinking about here, but also Honda. You have Korean automakers as well. You also have Tesla. And some of the numbers I've seen is the estimates in terms of labor costs for Tesla are between 25 and 40 percent lower than that of the big three. So it's a pretty significant difference.

And, you know, people can say what do they want about Elon Musk and Tesla's non-unionized. And so the same thing would apply for Toyota. But it does give the other automakers that don't have desire cost a big hedge. And like you were saying, if they're going to give these substantial increases, something's got to give, right? So if you pass it on to customers, then your vehicles at some point, you know, there's so much pricing power where customers might just say, look, why am I buying this vehicle? I want an EV. You know, I like yours or, you know, whatever the option is, but I'm just going to go and buy a Tesla instead. And Tesla has been pretty aggressive with price cuts too recently. And Tesla has been pretty aggressive with price cuts too recently. So I think it's, I just think they have to be careful because at the end of the day, these companies are there to make a profit. And if they're not, you know, how long will they survive? And, you know, people can say, well, oh, the US government would come in and bail them

out. You know, that's, I don't know about you. Obviously, we've seen it in the past. So I'm not saying it wouldn't happen. But at some point, I mean, is that, you know, you have to be careful, right? If that's your end game is that the US government will come and bail you out or Canadian government for the Canadian side. It just becomes risky.

So I do hope they come to a fair deal that works for both the employer and employees there. Yeah, it's ultimately, I mean, if you get a situation where it benefits one end way more than the other, I mean, like you said, if the employees got, you know, that 40% hike, and these big three automakers have to start raising prices to try and maintain margins. Meanwhile, like you said, Tesla is just sitting there cutting prices, cutting prices, cutting prices. I mean, eventually you're just going to buy a Tesla. I mean, it's getting to that point. I mean, a lot of people are sitting there thinking, well, why would I buy electric when it's so expensive? Well, like eventually, you know, if this situation was unfavorable to the auto producers i mean it might become not that expensive yeah i

don't know i've never i've never been a big fan of any of the automakers i mean they're just way too like i said they're just way too cyclical i haven't ever dug into them a lot but yeah i mean hopefully there's a resolution here because just economically for this to continue on would just be not good at all like just uh for both the united states and canada yeah because it impacts and i think we'll close on this before i think the next segment here but people kind of forget is all the businesses that are connected to the automakers right the automakers at the end of the day they just assemble the car yeah they get the parts from thousands probably of suppliers and all these suppliers will negatively be impacted i know we

have like magna here i'm sure they would get impacted pretty heavily with any kind of strike in canada while in the u.s too because there's uh you know so much cross border uh between um all the companies and the uh the big three here. But I guess enough about autos, we'll talk a little bit about death. So I'll segue into that with Park Lawn Corporation. It's definitely Park Lawn. Yeah, it's Park Lawn, not Park Fuels. I think there's two. Yeah, I confuse them all the time. Park Lawn Fuels. Yeah. Yeah, this is actually, this is also a company that i've owned for a very long time i think i purchased park lawn in it was like 2015 maybe 2016 um a lot of people might not

might not know what they are they're they're a funeral company um cemeteries uh crematoriums things like that acquisition based model like very heavy acquisition based model that's how they fuel the vast majority of their growth, 70%. And they aim to do the other 30% just through organic growth. So their targets are 75 to $125 million a year in acquisitions. And the funeral industry in the United States and Canada is extremely fragmented. 80% of funeral homes are still private in Canada and the U.S. So this company makes so many acquisitions, it's really just hard to keep track of.

But the one that we'll talk about today is just a pretty significant one. So they had submitted a deal to buy Carriage Service, which is a US traded funeral home company. So on June 29th, they made a release that they had submitted an all cash offer. They didn't disclose a price for actually quite a bit of time afterwards. It came out eventually that the price was $34 a share, which is about a 25% premium to what it traded at today. And just yesterday, October 2nd, it came out and said that it's pulling its deal after additional due diligence. So what I would imagine from this is they submitted the offer and then they did a strategic review and just really didn't like the overall debt situation. The debt situation is what I would foresee was the issue.

The debt situation is what I would foresee was the issue. Carriage Service has debt of $600 million on a market cap of only $411 million. Debt to equity of nearly $4 million. Interest coverage ratios of only about 2.3x. And just overall, in terms of the acquisition to Park Lawn, I checked this morning. Park Lawn was up quite a bit. So it had taken a pretty big dive after it announced this. It's lost 30% year to date. 25% of it came after this acquisition because Park Lawn is only a $600, $700 million company. So this was a pretty sizable acquisition

and it's a lot of debt for a company like Park Lawn, who is also in a considerable amount of debt. When we look to the net income of Park Lawn, it's down 30% year to date. And 74% of that decline in net income has solely come from increased finance costs. So I just think like this was probably a bullet dodged by Park Lawn. Like you're taking on a huge company with a massive amount of debt. And you're paying a 20% premium for it as well. That's exactly why I think the price has gone up, you know, post acquisition, it's just too much debt for them to take on. It's a pretty unknown company. I mean, a lot of people don't pay attention to them. They're a profitable small cap. They pay a pretty

decent dividend now, 2.5%. It's never really yielded that much. They don't grow the dividend that much. They have a high level of debt, but they also generate quite a bit of free cash flow. So I mean, just in terms of if both of these companies, Carriage and Park Lawn were to just eliminate all of their acquisition activity, Park Lawn could eliminate the debt in five years, whereas Carriage was around 12 and a half, 13. So that's if they dedicated 100% of free cash flow back to debt repayments. And just in terms of overall valuation, I mean, Park Lawn, they have a free cashflow yield of almost 10% now, and they're trading below book value for the first time in a decade.

It hasn't traded this cheap in over a decade. And I really think a large factor of it was in the fact they were taking on this acquisition, this size of an acquisition. I mean, almost the size of Park Lawn themselves. So, I don't know if you pay much attention to this company or... Yeah. Yeah. Actually, I used to own it. I sold it just before the pandemic started. So, I'm pretty familiar. I haven't looked at it recently in the last couple of years. But what I was showing is they've done a pretty good job with free cash flow per share. And that's one of my favorite metrics. Obviously, I look at a bunch, but that one I find, you know, it's always one I will look at pretty quickly just because it factors in share dilution.

And I tend to prefer free cash flow generally. But I do look at earnings as well just because it's really the cash that comes in and out. But no, it's performed. I mean, you know, it's surprising that the stock hasn't done that well overall. But it's definitely a company that I think I'll put back on my radar because, you know, whatever people want to say, you know, there's always going to be demand for their services. And there's not many sectors that can say that. And obviously, they can. Yeah, for sure. I mean, when you look to the fact that, like, obviously, a lot of people were passing away during the pandemic, which caused a massive surge in revenue and earnings.

When you look at an acquisition heavy company like this, obviously, when rates are low, they're going to be able to buy up companies with next to no interest costs. So they're going to be able to turn these into profitable synergies with the company right away. So they're growing like crazy in the pandemic. But when we look right now, they're still growing. It's not like they're realizing a decline in revenue. They're still noticing double digit increases in revenue. And like I said, it's pretty much solely financing costs that are hitting this company. They have a lot of floating rate debt. So I think financing in the latest quarter was financing expenses were $7 million US compared to like 2.8 a year ago, which is just hitting the bottom line huge. And obviously the market

is going to re-rate it based on that. But I mean, when you think of just the overall profitability of the company still, I mean, the dividend itself makes up only 24% of free cash flow. It's not going to grow the dividend, but it's certainly not going to cut it. I kind of wonder sometimes why it even pays one at all. But overall, I mean, I think if rates go down, you're going to see net income increase, should increase. I mean, it's pretty much that simple with a company like Parkland, just based on the fact that finance costs are just killing net income right now. Yeah. And I think that's a good way to wrap it up because I had another segment, but we're running a little And I think that's a good way to wrap it up because I had another

segment, but we're running a little long, so that's fine. But just wanted your thoughts because I was talking with Mike Yerouf, the Divin guy. He came on the podcast and we spoke about Enbridge. And I want to double click on maybe look at paying down debt and some companies being hit because they're paying more in terms of interest costs. And I don't know about you, but I would like to see some company with high debt levels to either stop raising the dividend if that's something they tend to do or even be proactive and cut the dividend so that they can shore up the balance sheet and just make the company stronger, you know, five, 10 years down the line. Unfortunately, I don't think many CEOs, executives and the boards have the where it all is to actually do that. But what are your thoughts on that? Like I, you know, we were talking about Enbridge, and I would actually be more interested by Enbridge if

they cut the dividend, pay down the debt significantly, and then looked at re-increasing the dividend down the line once the debt is at a more reasonable level. What's your general thought on that, especially those companies that are almost associated with their dividend payment? Yeah, it's much the same like pipelines, telecoms, things like that. I mean, a lot of them are really tight. In terms of Enbridge, I haven't had a chance to look at the recent acquisition in depth. So I can't speak on that a lot, but I know they do have, I think it's something crazy, like $75 billion in long-term. 80, yeah. 80, and I don't think it includes the acquisition yet. Yeah. I mean, you'd really need to dig into the structure of that debt. I mean, you'd really need to dig into like the structure of that debt. I mean, it would be more beneficial to investors over the long term if they probably did focus on debt reduction. But I mean, like a lot of the time, when you look at, like you said, a company like Enbridge, they are associated with that high yielding dividend, much like a company even like TC Energy, Pemina Pipe, not as bad, but it's still

like primarily focused on that. And when you look at, you know, the big telecoms like BC or Telus, they both guided to free cash flow that's less than the dividend this year. So clearly, you know, they're thinking that still investing a lot of CapEx into the business is going to provide and raising the dividend is going to provide more long term returns for investors than just kind of scaling that back and reducing debt. I tweeted probably a week or two ago that that B.C. needs to hit the upper end of their free cash flow guidance to even cover the dividend. end of their free cash flow guidance to even cover the dividend. TELUS has pretty much said they're going to realize a $500 million shortfall relative to the dividend relative to free cash flow, but they haven't cut their capital expenditures, right? So, I mean, at some point, how much do you trust management to make these acquisitions to, you know, these capital outlays to essentially benefit you in the long term.

It's tough to say. I mean, these companies haven't seen these interest rates in what? It's got to be 20 years. 2007, yeah, I think was the last time. 15, 16 years. Yeah, yeah. I mean, it's really tough to say. I would say it's probably easier for a company like Telus or BCE to scale back capital expenditures and kind of maintain that dividend than it is a company like telus or bce to scale back capital expenditures and kind of

maintain that dividend than it is a company like enbridge especially when they like make that mammoth acquisition and yeah i don't know i've never i i own tc energy i sold tc energy i don't own any any pipelines um i do own telecoms i don't just tellus. Okay. No, well, my idea too is just I just feel sometimes that management incentive is not – or they just don't think in long term. They just kind of think more in like two to four years at most if you're lucky. If you're really lucky, five years, they'll think. I just find that it would make a whole lot of sense to pay down that debt for a lot of them and just take a short term hit to make the business stronger and

probably put it in a position to make some really good acquisition down the line because they would then have the flexibility to do so and potentially some competitors that did not take those steps and are struggling and you can go and buy them on the cheap. But I guess that's a more philosophical question. Yeah, I guess it's not necessarily just the companies that are dedicated to the dividend either. I mean, I own Jameson Wellness, they did the exact same thing. They made a massive acquisition during the pandemic. Financing costs are kind of killing the company right now. I mean, I still own them. I'm still pretty confident they'll turn things around. But then they go and raise the dividend by

double digits. And you're just like, you know, you're why don't you just allocate some of that money to paying down debt? And they're like a brand new aristocrat. I mean, they probably want to be that small cap dividend growth company. But like, ultimately, you know, it would definitely be more beneficial to shareholders really should be for them to just reduce that debt. Yeah, no, exactly. Well, I think that wraps it up for today. Dan, thanks a lot for for joining me and co hosting this. If just before we let people go, can you remind them where they can find you? I know you're on Twitter or X or whatever you want to call it. And then stocks, stocktrades.ca, right? Yeah. So stocktrades.ca, the Twitter, Twitter's the only social media I use,

stocktrades underscore CA. And then we have a YouTube channel. We haven't been publishing on it much, but if you want to watch some older videos on there, just look up stock trades on YouTube. Okay, no, that's perfect. Well, thanks for joining us. And hopefully, we'll do that again soon. Yeah, thanks for having me. The Canadian investor podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.