The North West Company – Not over the S&P500

The North West Company is a leading retailer catering to the needs of underserved rural communities and neighborhoods in Northern Canada, Western Canada, rural Alaska, the South Pacific islands, and the Caribbean. 

The North West Company offers a wide range of products and services including food, family apparel, housewares, appliances, outdoor products, and services such as post offices, income tax return preparation, quick-service prepared food, commercial business sales, money transfers, and cheque cashing. It derives ~75% of its revenue from food sales and the balance 25% from general merchandise and others.

The North West Company derives 60% of its sales from Canada and the remaining 40% from international markets. As a leading retailer to rural and remote communities and urban neighborhoods, the company operates through 117 Northern stores, 46 Giant Tiger discount stores, 24 Quickstop stores, 5 NorthMart stores, pharmacy and convenience stores and NSA in Canada, and 27 Alaska Commercial Company, 12 Cost-U-Less stores, 4 Quickstop convenience stores, 7 Riteway Food Markets, etc. in the international markets.

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Revenue Growth & Market Exposure

The North West Company has a long experience in the retailing industry with a history dating back to 1668. Given its extensive history, the company offers the best shopping experience for everyday household and lifestyle needs. Its strong operational focus helps to release critical store hours as well as tackle low-value activities.

North West Company’s logistical expertise and infrastructure enable it to cater to the new markets and complementary businesses. Its own cargo airline also gives it a logistical advantage. Its well-established outbound supply chain helps it to reach its remote stores. The company’s ability to serve difficult-to-reach locations and lower-income customers are its key competitive advantages. North West Company enters into store lease arrangements with community-based development organizations and recruits local people into management positions in order to successfully operate in these environments. 

The company witnessed a 16% increase in YTD revenues driven by market share gains and a continuing shift towards in-community spending. Both food and general merchandise sales increased by nearly 16% each. It has already incurred ~$14 million in COVID-related expenses and expects another $4 million in the next quarter. North West sold 36 of its Giant Tiger stores in the second quarter which pulled down sales.

As part of the Giant Tiger Transaction, the company and GTSL entered into a reciprocal product supply agreement that would enhance buying efficiencies and provide an expanded general merchandise assortment. The sale is expected to result in lower sales in the fourth quarter of 2020.

North West has compounded its revenue at more than 6% CAGR annually for the last five years. The company is focusing on store development and management, supply chain strength, and community relations for future growth. It has been expanding organically as well as through accretive acquisitions. The North West stores have started online and phone ordering with pick-up or delivery service for vulnerable customer groups during the pandemic. About 30% of NSA’s revenue is passenger-based, which fell by 50% due to restrictions on non-essential travel.

Dividends

The North West Company is a Canadian dividend aristocrat. It has an impressive dividend yield of 4% and a dividend payout ratio of 57%. North Wests’ last dividend hike was over 9% and its five-year dividend growth was 3%+ CAGR annually. 

North West derives over 90% of its annual revenue from everyday need categories which grant resilience to its cash flows. The company is highly diversified by products and geographies. With a century’s old experience, North West Company has developed a strong presence in the retail industry.

The company operates in remote communities with almost nil competition. The company has successfully expanded its market share within existing locations and in new markets as well as complementary businesses by leveraging its core remote market capabilities and expertise. North West has maintained a debt-to-equity of less than 1 since 2000.

The growing demand for food should act as a tailwind for this Dividend Aristocrat. A proven business model, an extensive store and distribution network infrastructure, and a reputed brand name form a deep moat around North West Company’s business. In Canadian Operations, The North West Company is on-track to achieve its targeted $17 million in annualized administrative cost savings by the end of the year. It expects to incur  $75 million in capital expenditures in FY2021.

The company, however, anticipates headwinds in tourism-dependent countries like the British Virgin Islands and St. Maarten if cases continue to rise.

The North West Company (NWC) historical yield
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Competition

North West Company faces intense competition from new players both local and outside the community. The significant growth of e-commerce businesses such as Amazon.com also poses a big threat to the company. However, it will be difficult for newcomers to compete with the company’s operational scale.

The company’s ability to adapt to unique local lifestyles, and serve communities that are restricted for usage by local businesses distinguish it from peers. It enjoys a leading market position in a majority of the markets it serves. Alimentation Couche-Tard, George Weston, Loblaw Companies, and Metro Inc. are North West Company’s top competitors. 

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:ATD.BATD.BAlimentation Couche-Tard Inc.Consumer DefensiveGrocery Stores0.7444.6848.8914.8314.833.120.00780.780.000040.350.2806105Consumable - NecessitiesYESYESYESNOCanada1
TSE:LLLoblawConsumer DefensiveGrocery Stores0.4774.8326.0422.6922.694.430.01791.790.391341.340.060955Consumable - NecessitiesNONOYESNOCanada1
TSE:WNWNGeorge Weston LimitedConsumer DefensiveGrocery Stores0.43117.2618.0566.2266.226.900.01881.881.185242.200.058755Consumable - NecessitiesNONOYESNOCanada1
TSE:DOLDOLDollarama IncConsumer DefensiveDiscount Stores0.4355.9017.1629.4929.491.900.00360.360.093940.200.066365Consumable - DiscretionaryYESYESYESNOCanada1
TSE:MRUMRUMetroConsumer DefensiveGrocery Stores0.6658.7414.6317.7917.793.420.01701.700.271341.000.144886Consumable - NecessitiesYESYESYESNOCanada1
TSE:EMP.AEMP.AEmpire Co Ltd A NvtgConsumer DefensiveGrocery Stores0.4841.7811.3915.9315.932.640.01241.240.193840.520.066455Consumable - NecessitiesNOYESYESNOCanada1
TSE:NWCNWCThe North West Company Inc.Consumer DefensiveGrocery Stores0.5535.001.7010.3010.303.280.04114.110.303941.440.041147Consumable - NecessitiesNONOYESNOCanada1

Bottom Line

Cases are on the rise in northern Canada and in international markets. The North West Company benefitted from higher local retail demand as a result of a drastic drop in travel due to the pandemic and expects above-average demand for its products and services in the future.

The company is in a good position to benefit from the growth in high potential markets and products. Its ability to deliver goods and services within hard-to-access and less developed markets is its key USP. A regular stream of cash flow from a consumer defensive business and ongoing investments should support the company’s dividend growth streak in the future.

NWC vs TSX vs SP500
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The North West Company (NWC) historical pe
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