We do not plan a large change to our fair value estimate after no-moat Canadian Tire posted first-quarter results that leave our 2018 targets in reach (3% revenue growth and 50 basis points of adjusted EBITDA margin contraction versus our forecast of 4% and 60 basis points). Seasonally, the first quarter is smallest. Our long-term forecast--for low-single-digit revenue growth and 13% adjusted EBITDA margin on average for the next decade--is intact.
Canadian Tire also announced it will buy Helly Hansen, a global seller of sportswear and workwear, for around CAD 1 billion. Management has sought to boost Canadian Tire’s product brand lineup and cites Helly Hansen’s reputation, category mix, and potential as a global expansion platform for other owned labels.
We are skeptical of this rationale, particularly as the price corresponds to roughly 20 times trailing EBITDA, near trading levels for more established apparel firms with more cachet that we cover (such as narrow-moat Moncler, which at roughly 22 times trailing adjusted EBITDA is trading well above our valuation; even wide-moat Nike trades at around 21 times trailing adjusted EBITDA). We agree that Helly Hansen has growth potential, but the price still appears rich, with limited cost synergies. Also, in our view, Canadian Tire will have to add more brands to capitalize on the global distribution potential (building on Helly Hansen’s roughly 5% of pro forma sales). Helly Hansen will continue to be sold at other Canadian outlets, and we expect Canadian Tire’s interest in using its international presence (other core markets include the U.S. and the U.K.) to lend a global bent to future deals, with purchased labels not necessarily exclusive to the retailer. We are concerned about the distraction that a globally distributed Norwegian apparel mark and ancillary purchases can create, particularly amid intense retail competition, although we are encouraged that Helly Hansen’s leadership will remain.
We are more encouraged by the launch of deliver-to-home options for online sales and Canadian Tire’s recently announced Triangle Rewards loyalty program (both to come later in 2018). We believe the ship-to-home offering is important to meeting threats from digital retailers by providing a more comprehensive omnichannel presence that capitalizes on the firm’s store network and distribution breadth. Furthermore, we suspect the rewards program can boost traffic and customer loyalty while providing valuable customer behavior data. Still, with switching costs virtually nonexistent, we see little relief from the intense competition that the firm faces for customers who are ultimately price-sensitive and on the lookout for deals.
