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Topic: Growth Stocks

Growth Stocks: Liquor Stores N.A expands in the U.S.

Pat McKeough recently replied to an Inner Circle member looking for an opinion on this Canadian alcohol retailer. Liquor Stores is now focused on expanding its U.S. presence, says Pat. But that strategy carries some risk.

Q: Good day, Pat: Could you give me your opinion of Liquor Stores N.A. Ltd. (TSE: LIQ). Thanks.

A:LIQUOR STORES N.A. LTD. (symbol LIQ on Toronto; www.liquorstoresgp.ca) is North America’s largest publicly traded liquor store operator, with 253 outlets. Of that total, 213 are in Canada—179 in Alberta, and 34 in B.C. In the U.S., the company has 22 stores in Alaska, 15 in Kentucky, two in New Jersey and one in Connecticut.


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Liquor Stores’ banners include Liquor Depot, Liquor Barn, Brown Jug, Joe Canal’s Discount Liquor Outlet and LQR MKT.

The company’s sales rose 26.2%, from $591.5 million in 2011 to $746.4 million in 2015. Earnings fell from $1.08 a share (or a total of $24.8 million) in 2011 to $0.49 a share (or $11.5 million) in 2013. Earnings then improved to $0.54 a share (or $12.9 million) in 2014. However, the company lost $3.64 a share (or $99.6 million) in 2015 due to the writedown of its operations in Western Canada and Alaska.

The company partly fuels its growth with acquisitions. For example, in November 2015, it acquired 51% of Birchfield Ventures LLC, for $15.0 million U.S. The company has the right to acquire the remaining 49% for $14.4 million U.S. over the next few years.

Birchfield operates two large format stores in New Jersey under the Joe Canal’s banner. Those locations are 17,000 and 25,000 square feet in size and are considerably larger than Liquor Stores’ Canadian outlets. They range in size from 2,000 to 5,000 square feet. The Birchfield purchase should add from $0.04 to $0.08 a share to the company’s annual earnings.

In the three months ended September 30, 2016, Liquor Stores earned $4.6 million, up 10.7% from $4.2 million a year earlier. Due to more shares outstanding, per-share earnings gained 6.7%, to $0.16 from $0.15. The increase was the result of cost cuts and lower income taxes. They offset higher interest expenses.

Growth Stocks: Sales up 7.5%

The company’s overall sales in the quarter rose 7.5%, to $208.8 million from $194.2 million. The increase came from acquisitions. Same-store sales (which excludes newly acquired stores) decreased 2.1% in Canada due to poor weather and a weak economy in Alberta. U.S. same-store sales declined 1.2% due to increased competition in Kentucky.

Liquor Stores’ long-term debt was $156.8 million as of September 30, 2016, or a very high 54% of its market cap.

On October 20, 2016, the company opened its first LQR MKT store in Norwalk, Connecticut. The company expects this brand to fuel its growth in the Northeastern U.S. With roughly 20,000 square feet, LQR MKT sells over 4,000 wines and 2,000 spirits; it also offers Norwalk’s largest walk-in beer cooler with over 1,000 labels available. Early results have been promising, according to Liquor Stores CEO Stephen Bebis.

In November 2016, the stock jumped 10% after activist investor PointNorth Capital revealed it owns almost 10% of the company. This is the same firm that recently pressured long-term-care operator Extendicare to add shareholder value. As part of that process, PointNorth got three seats on Extendicare’s board.

Beyond working with Liquor Stores to improve its operations and growth strategy, PointNorth has yet to reveal a specific strategy it wants the company to pursue.

Liquor Stores trades at 15.9 times the company’s forecast 2017 earnings of $0.66 a share. The company pays a monthly dividend of $0.03 a share for an annual yield of 3.4%. While that payout adds appeal, Liquor Stores’ high debt and its expansion into the highly competitive U.S. market adds considerable risk.

Inner Circle recommendation: We don’t recommend Liquor Stores N.A.

For our recent report on a Canadian growth stock with a distinct niche in the resources sector, read Restructuring sets Wajax up for gains.

For our views on making the best choices in growth stocks, read Important factors to look for when seeking high return investments

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