Pat McKeough responds to many personal questions on specific stocks and other investing topics from the members of his Inner Circle [1]. Every week, his comments and recommendations on a selection of the most intriguing questions of the past week go out to all Inner Circle members. And every Friday, we offer you one of the highlights from these Q&A sessions.
This week, there was a question about a stock that has been on the rise, Canada’s biggest private liquor store operator. Pat examines the company’s prospects for future growth in Canada as well as the possible risks and rewards of U.S. expansion.
Q: Pat: Can I have your recommendation on Liquor Stores N.A.? Thank you.
A: Liquor Stores N.A. Ltd. (symbol LIQ on Toronto; www.liquorstoresna.com [2]), is Canada’s largest private liquor store operator, with 238 outlets. Of that total, 174 are in Alberta, 35 are in B.C., 20 are in Alaska and nine are in Kentucky. Liquor Stores’ banners include Liquor Depot, Liquor Barn and Brown Jug.
Alberta privatized retail liquor sales in 1993, prompting Irv Kipnes to found Liquor Depot and Henry Bereznicki to start Liquor World that year. Kipnes and Bereznicki, both Edmonton-based real estate developers, merged their companies and founded Liquor Stores Income Fund in 2004.
The fund first sold units to the public at $10 and began trading on Toronto in September 2004.
Liquor Stores Income Fund converted to a regular corporation on December 31, 2010, in response to Ottawa’s income trust tax.
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Stock investing advice: Liquor Stores sales get a big boost from Alberta
The company’s strategy is to offer customers more choice—typically two to three times more products than its competitors. Liquor Stores lets each store juggle its product mix to meet local tastes.
In the third quarter of 2011, the company earned $15.8 million, or $0.48 a share. That’s a big jump from the $2.9 million, or $0.15 a share, that it earned a year earlier. However, the latest figure includes a $4.9-million gain on the settlement of a lawsuit. The company also had a $4.8-million foreign exchange gain in the latest quarter, compared to a $1.8-million loss a year earlier. Cash flow per share rose 10.2%, to $0.54 from $0.49.
Sales rose 3.6%, to $157.1 million from $151.6 million. Same-store sales rose 7.1% in Canada, mainly due to a 10.1% increase in Alberta. That’s mainly because the company is keeping its stores open longer and spending more on promotions. Same-store sales rose 1.2% in the U.S.
Liquor Stores’ long-term debt of $101.7 million is a manageable 26.2% of its market cap. It also holds cash of $895,000, or $0.04 a share.
The company pays a monthly dividend of $0.09 a share, which yields a high 6.3% on an annualized basis. In the latest quarter, it paid out 50.0% of its cash flow as dividends.
The company entered the U.S. in 2008, when it bought 19 Brown Jug stores in Alaska. It followed that with its purchase of eight Liquor Barn stores in Kentucky in 2009.
The stock trades at 16.2 times the $1.06 a share its forecast to earn in 2012.
In the latest Inner Circle Q&A, Pat looks at the company’s growth potential in a Canadian market dominated by government monopolies and at whether it can sustain its high dividend yield. He also examines the pros and cons of its U.S. expansion. He concludes with his clear buy-hold-sell advice.
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