Canadian Quarterly Earnings Pulse - Q1 2023

Michael Huynh May 25, 2023
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This week, we continue to summarize the broader pulse of public Canadian companies by looking into another set of quarterly earnings (previous post).  

Below, we highlight the Macro, Industry and Corporate trends that we have observed along with quotations from 5i coverage company executives. In this weeks Earnings Pulse, we note underlying themes of companies using artificial intelligence to improve customer experience and how management teams invested for future growth while being mindful of cost controls, as well as executives’ views on capital allocation during an economic downturn.


In spite of high interest rates, the housing shortage still remains a structural issue

“Although new supply continues to make headlines and overall housing shortage still remains, interest rates continue to rise with the gap between rent-to-own rates making it harder for our residents to become homeowners. We continue to experience strong rental rate growth in all of our U.S. sunbelt markets. For Q1, our blended lease trade-out for our portfolio including Jackson Park -- excluding Jackson Park, was 6.4%. Despite the reports of elevated supply, we believe our well-located and high-quality product will buoy our future occupancy and continue to support our rental growth.” – H&R Real Estate Investment Trust (HR.UN) COO, Emily Watson


​​Artificial Intelligence (AI) is crucial to improve user experience and cut costs amid a challenging environment

“Another example of how Shopify is staying at the cutting edge of commerce is the AI shopping assistant that Shop launched in March. Shoppers tell the assistant what they are looking for, and it serves up relevant product recommendations from Shopify merchants. It's like having your own shopping concierge powered by ChatGPT, one of the most advanced technologies that we have seen in decades. We believe that we are in the early innings of unlocking the true power of AI, not only for our merchants and their customers, but also for Shopify.” – Shopify Inc. (SHOP) President, Harley Finkelstein


Despite an economic downturn, investments in infrastructure are crucial to sustain future growth

“As a reminder, we are moving from a third-party operated 150,000 square foot facility to a brand new Aritzia-operated 550,000 square foot location that is designed to support several years of growth. The racking is in now, and it remains on track to open in late August.We ended the quarter with inventory up 125% over last year. Our inventory is heavily concentrated in client favorites and the year-over-year growth has further moderated throughout Q1 of fiscal 2024. We continue to expect growth to more closely align with sales trends by the end of Q2. Our growing recognition and industry-leading wages have allowed us to continue attracting world-class talent.” – Aritzia Inc. (ATZ) CEO, Jennifer Wong


International expansion will be the primary key to Gross Merchandise Value (GMV) growth

“Moving on to going global. One way we are driving greater penetration internationally is by making it easy for a merchant to sell globally as they do locally. During the quarter, approximately 15% of total GMV were cross-border as our primary products that were rolled out last year, Markets and Markets Pro, continue to gain traction. Markets makes it simple to localize the buyer experience for each region a merchant sells to by enabling local currencies, which is a key determinant for consumers, offering local payment options and collecting duties and taxes at checkout to create total cost clarity. All of this can be customized in one place in the Shopify Admin with ease.” – Shopify Inc. (SHOP) President, Harley Finkelstein


US remains one of the largest addressable markets due to resilient consumer spending

“In addition, we added 7 new boutiques in the United States to an increase of 18%. The U.S. now generates more than half of our total net revenue, and we still have a long runway of growth ahead of us.Turning to Q4, record sales were higher than anticipated across all channels and all geographies. Net revenue of CAD638 million increased 44% from last year with comparable sales growth of 32%. This growth was primarily fueled by our business in the U.S., where outstanding pace continued, growing by 56% from last year while in Canada we saw strong sales growth of 32%.” – Aritzia Inc. (ATZ) CEO, Jennifer Wong


Reduced freight volumes lead to a contraction in operating margins…

“Our operating income during the first quarter was $166 million, with an operating margin of 10.7% versus the year earlier period of $220 million with an operating margin that was 90 basis points higher at 11.6%. In addition, our adjusted net income of $117 million was down from $158 million the prior year and our adjusted diluted EPS was $1.33 was down from $1.68. Importantly, the year-over-year change in these items reflects not only the reduced freight volumes and the sale of CFI, but also the fact that our earnings are fully burdened by several items for which we did not adjust” – TFI International Inc. (TFII) CEO, Alain Bedard


…However, efficient cost controls and a well-capitalized balance sheet improve returns on invested capital

“Our shipments were down 20% in the U.S. and 9% in Canada, which along with foreign exchange contributed to a 17% decline in our revenue before fuel surcharge. Reported operating income of $58 million was down 39%, fully burdened by the costs I referred earlier that we do not exclude, namely severance costs and IT system transition, again. Within LTL, Canadian revenue before fuel surcharge was down 12%, but we achieved a significantly improved operating ratio of 75.5%, which was 360 basis points better than the prior year period. Similarly, our return on invested capital for our Canadian LTL was 23.2%, up significantly from 18.4% a year earlier.” – TFI International Inc. (TFII) CEO, Alain Bedard


Despite the tough real estate market, industrial properties located in key areas are still in high demand

“Industrial properties located in key industrial markets remain in high demand as we realize continued rental rate growth. And our high-quality grocery-anchored and single-tenant retail property portfolio are well -- are performing well, providing essential services to their respective communities.” – H&R Real Estate Investment Trust (HR.UN) CEO, Thomas Hofstedter


Growth and profitability need to be balanced in a tough environment

“This growth is supported by a strong foundation of profitability. Sujeet will offer more details momentarily, but I am pleased with this quarter's overall posture of 45% against a rule of 40% benchmark. Bookings were excellent this quarter, adding to our backlog of future revenue. We closed $7.7 million in bookings, reflecting expanded strength in demand, the quality of our pipeline and our team's ability to convert opportunities into wins. I'd also like to share some of the in-flight initiatives we are excited about, which we believe will help capture even greater improvements to our top and bottom lines.” – Sylogist Ltd. (SYZ) CEO, William Wood


Legal software applications are highly fragmented providing mission-critical solutions for law firms to serve their clients

“With the primary focus on the legal sector, we offer our customers a fully integrated legal technology software suite. It gives them almost every capability required to run a law firm efficiently and reliably. We believe our depth and breadth of experience in marketing software in legal community is unmatched.Today, we are one of the world's largest providers to this market for software that provides the productivity tools required to manage small and medium-sized law firms as well as the mission-critical workflow and matter-specific software applications that enable the automation of various areas of loss.As you'll see on Slide 7 of the earnings presentation, law firms rely on our software every day to serve their clients across a variety of needs from litigation to the conveyancing of real estate to wills, due diligence and more” – Dye & Durham Limited (DND) CEO, Matthew Proud


High-quality office properties are protected by strong creditworthy tenants and long-term lease terms

“Our office properties are in strong urban centers with a weighted average lease term of 7.2 years and leads to strong creditworthy tenants with 80.4% of office revenues coming from tenants with investment-grade ratings.” – H&R Real Estate Investment Trust (HR.UN) CFO, Larry Froom


Strong cash flow generation provides companies with options for capital allocations

“Many times over the years, including last year, you've heard me mention that profitability and cash flow are most important to us as they allow us to be nimble, especially during uncertain times when we can't capitalize on market turbulence. This means that the ability to steadily invest in the business, opportunistically pursue acquisition, and return excess capital to shareholders whenever possible” – TFI International Inc. (TFII) CEO, Alain Bedard


Divesting non-core business and focusing on what the companies do best benefits long-term shareholders

“On logistics, building logistics infrastructure is a side effort that all e-commerce entrepreneurs are eventually pulled into. Shopify decided to take this on, on behalf of every merchant because we're significantly larger and we can leverage our scale to build this on their behalf. Flexport has been a key partner throughout this journey. And given our long history of building direct integrations into powerful platforms, we believe that Flexport will be the best partner to carry this vision forward. And for our merchants, making it easier for them to access fast, reliable fulfillment from port to porch is a shared vision that Flexport will now take the lead on as our preferred logistics partner, led by world-class operators, CEO, Dave Clark and Founder Ryan Petersen, now with the leadership of Deliverr founder, Harish Abbott, this planned sale will enable Flexport to leverage their DNA in logistics and allow Shopify to focus on what we do best, designing and scaling a breadth of solutions and essential infrastructure that our merchants need to compete in an increasing digital world.” – Shopify Inc. (SHOP) President, Harley Finkelstein


A sound financial position allows companies to pursue inorganic growth through acquisitions and expand their market presence

“Sylogist thas now had 2 consecutive strong growth quarters and is extremely well-positioned to continue seizing opportunities to grow both organically and inorganically. We have the most experienced and dynamic management team in the business. We have modern and competitive SaaS solutions that our target markets are anxious for and we have the self-funding capacity and access to capital necessary to execute our strategy. That includes inorganic growth via strategic acquisitions that add customer density and complementary IP to our platforms.” – Sylogist Ltd. (SYZ) CEO, William Wood


Recurring revenue continues to become an increasingly larger portion of total revenue due to its high-quality nature…

“Our business continued to perform well during the third quarter despite a challenging operating environment. So far, this fiscal year, we made important progress across key areas. Most notably, we've grown our contractual annual recurring revenue to a point where today, it's 18% of our total revenue and continue to grow.” – Dye & Durham Limited (DND) CEO, Matthew Proud


…in addition to disciplined cost control initiatives, this allows management to repurchase undervalued shares aggressively

“We've reduced our operating expenses by $42 million or close to 20% as measured on a year-over-year basis and significantly exceeded the 10% target set out in our cost reduction plan last November.Year-to-date, we reduced the number of shares outstanding by 20%.” – Dye & Durham Limited (DND) CEO, Matthew Proud


Rent increases and consistent occupancy levels drive operating income expansion

“Emily will provide more detail on this growth shortly. Industrial same-property net operating income increased by 10.2%, driven by rent increases from new and renewing tenants as well as an increase in occupancy. Office same-property net operating income increased by 5.4%. The increase was largely attributable to the strengthening U.S. dollar and the receipt of $865,000 as a lease termination payment.” – H&R Real Estate Investment Trust (HR.UN) CFO, Larry Froom


Companies mentioned:


TFI International Inc. (TFII)

Q1 Revenue Growth: -15.6% |  Q1 EPS Growth: -19.1%


Dye & Durham Limited (DND)

Q3 Revenue Growth: -15.3%  |  Q3 EPS Growth: N/A


H&R Real Estate Investment Trust (HR.UN)

Q1 Revenue Growth: 41.0%  |  Q1 EPS Growth: -89.6%


Sylogist Ltd. (SYZ)

Q1 Revenue Growth: 21.2%  |  Q1 EPS Growth: -86.0%


Aritzia Inc. (ATZ)

Q4 Revenue Growth: 43.5%  |  Q4 EPS Growth: 10.5%


Shopify Inc. (SHOP)

Q1 Revenue Growth: 22.3%  |  Q1 EPS Growth: N/A


These are quotes from just some of the more than 60 Canadian companies we cover at 5i Research. To view their recent reports you can search for their tickers in the Reports section. If you are not a member and would like to gain access to these reports as well as the Q&A service where you can ask and search questions on these companies, you can fill in your information below to sign up for a free trial.

Take Care,

5i Research Team Signature





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