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 foreign currency headwinds, rising interest rates impacting financial results, macro environment uncertainty, easing pressures from inflation, and improvements in the supply chain.
Macro
Inflation is expected to be softer next year
“Here's a market condition that is changing, okay, a little bit more softness in the market. But we also have some tailwind, right? So if you look at '22, we have lots of costs for that transition that will disappear in '23. You have also our sales team that's more focused on freight that is logic, intelligent to us versus just chasing freight for the sake of freight. So you got plus and minuses.” – TFI International (TFII) CEO, Alain Bedard
…and supply chain improvements contribute to better-than-expected results
“The supply chain environment evolved positively as expected in the second quarter, and we are seeing improvement in all key areas. Delivery schedule of component, requiring semiconductors is better. We are dealing with less supplier disruption, which helped the planning of our production schedule and logistics, cost, availability and level are all improving. We are also seeing price coming down across many commodities, which could be favorable long term.” – BRP Inc. (DOO) CEO, Jose Boisjoli
Also, foreign exchange and interest rates are creating headwinds for companies
“Our total revenue for the third quarter grew to nearly $1.4 billion, 22% higher than the same period last year, driven primarily by Merchant Solutions revenue growth. On a 3-year basis, our revenue compound annual growth rate was 52%. Given the significant strengthening of the U.S. dollar relative to foreign currencies in Q3, total reported revenue growth year-over-year for Q3 was negatively impacted by approximately 2 percentage points.” – Shopify Inc. (SHOP) CFO, Amy Shapero (leaving)
“The continued increases in interest rates drove unrealized losses in our fixed income portfolios, though the impact was mitigated through a short duration posture and favorable foreign exchange” – Trisura Group Ltd. (TSU) CEO, David Clare
…However, higher bond yields offer attractive returns for fixed income portfolios going forward
“Prevailing bond yields driven more accretive to portfolio yield than last quarter, meaning we are improving our base of interest and dividend income on a risk-adjusted basis for years to come.” – Trisura Group Ltd. (TSU) CEO, David Clare
Companies are also expecting slower e-commerce activity this winter season
“our P&C segment represents 6% of our total revenue before fuel surcharge. We saw a 10% decline in revenue before fuel surcharge, mainly related to slower volume associated with e-commerce activity.” – TFI International (TFII) CEO, Alain Bedard
Consumers' demand for recreational products is not affected by macro conditions
“Moreover, despite higher interest rate, consumer credit expectation remains stable, and we are seeing many positive signs of continued trend in demand. We still see a strong influx of new entrant of 41%. Website traffic and Google search for our different brands remain significantly higher than pre-pandemic level. Retail velocity is solid, and dealer bookings following our BRP Club is ongoing and orders are trending up over 20% versus last year.” – BRP Inc. (DOO) CEO, Jose Boisjoli
Industry
The hospitality industry has recovered to pre-COVID levels
“We are very pleased with the post-pandemic recovery of our casual dining brands, which are now operating at full capacity, as well as by the progression of the locations that were most affected by the pandemic. We are also pleased with the ability of the concepts that performed well during the pandemic to capitalize on the momentum created during the pandemic to continue their growth.” – MTY Food Group Inc. (MTY) CEO, Eric Lefebvre
Digital sales have become a more important growth channel for restaurants
“Digital sales, meanwhile, improved 5% year-over-year to CAD 194.1 million or 18% of total sales in the third quarter of 2022. Canadian Digital sales increased CAD 3.3 million year-over-year on the strength of higher fast-casual digital sales, mainly owing to the gradual return to the office for many customers. We increased the frequency of lunch orders and outings. U.S. digital sales rose CAD 5.3 million compared to the third quarter last year.
Digital sales are a key strategic opportunity for MTY for the future, and we're deploying efforts to increase the amount of proportion of those sales in the future.” – MTY Food Group Inc. (MTY) CEO, Eric Lefebvre
Social media is becoming an effective channel to build brand awareness
“The combination of our boutique expansion and beautiful product collections continued to propel our brand awareness. The Aritzia brand is resonating incredibly well with our clients, who have been actively posting about us on TikTok, generating 2 billion views to date.
Our clients are doing the talking for us. And through our own social and influencer strategies, we are amplifying what they are already saying.” – Aritzia Inc. (ATZ) CEO, Jennifer Wong
…and a key growth opportunity
“While still very nascent, GMV through native checkout integrations on key partner services such as Facebook, Instagram and Google, more than tripled from Q3 last year. The more merchants continue to invest in multichannel sales, the more successful they become in building brand value amongst their consumers.” – Shopify Inc. (SHOP) President, Harley Finkelstein
Brand name has become an increasingly competitive advantage in challenging environments
“Another encouraging data point in the third quarter was reflected by the number of restaurant openings climbing to 63, sequentially better than the 47 openings realized in the second quarter and also better than the same period last year. As mentioned in last quarter's conference call, the construction of new locations remains under pressure due to ongoing supply chain, permitting, construction and final inspection issues. At the present time, we have more than 150 restaurants under construction and a very healthy pipeline for future locations. The store construction process is gradually improving, and when combined with a strong pipeline of franchise owners, it bodes well for the future growth at MTY.” – MTY Food Group Inc. (MTY) CEO, Eric Lefebvre
…and maintain margin
“Our gross profit margin was roughly in line with our expectations, ending at 24.7%. But was down in comparison to last year's level as the benefit from volume, mix and pricing was more than offset by supply chain and inflation, which both impacted logistics, commodities and labor costs.” – BRP Inc. (DOO) CEO, Jose Boisjoli
Corporate
One of the main tools to create shareholder value is capital allocation
“given the emphasis we place on intelligent capital allocation, we view our robust free cash flow as strategically important as strategically important.” – TFI International (TFII) CEO, Alain Bedard
…and operational efficiency
“So we think about that long-term average target for fronting operational ratio hopefully being in the mid-70s and you hopefully see that accrete over 2023 back down to that level. And certainly that's something we'll keep both you and our investors really up to speed within our comments.” - Trisura Group Ltd. (TSU) CEO, David Clare
Selective M&A activities due to higher funding costs
“I think that with the interest rates, I mean, PE, those guys, they love with interest rates are low because their cost of funding is really cheap, so they could do all kinds of things. Right now, with interest rates moving up and up and up, I mean, they're getting a little bit more skittish.” – TFI International (TFII) CEO, Alain Bedard
…and companies that are building scale
“Through the BBQ Holdings deal, we're building additional scale in the U.S. We're expanding our casual dining footprint. We're combining complementary franchise and corporate-owned businesses, know-how. We are acquiring an established retail sales operation, and we're adding a talented management team and employee base. This latest acquisition will complement our primary expertise in running franchise-operated restaurants and expand our overall footprint to approximately 6,900 locations and pro forma system sales close to CAD 5 billion.” – MTY Food Group Inc. (MTY) CEO, Eric Lefebvre
Merchants need end-to-end logistics platforms to solve supply chain issues
“The first combined SFN and Deliver facility is already operationally functional in Atlanta and have seen a tenfold quarter-over-quarter increase in the number of merchants holding inventory in our facility. We anticipate that unifying the network will be complete in Q1.
Second, as we mentioned last quarter, we are building an end-to-end logistics platform that will connect every single part of a merchant supply chain. It enables merchants to dynamically route inventory across all their channels from B2B to D2C. Ultimately, we will create a fulfillment network that can accept orders and make customer delivery promises from the moment of merchants' goods lead their supplier.” – Shopify Inc. (SHOP) President, Harley Finkelstein
…and expand globally
“We're also investing in our merchants' ability to grow by helping them go global. Shopify Markets, which launched in Q1 allows merchants to identify, set up, launch, optimize and manage their international markets from a single storefront. To date, more than 175,000 merchants across the world have used markets to help launch their international businesses.” – Shopify Inc. (SHOP) President, Harley Finkelstein
Companies mentioned:
Q3 Revenue Growth: 7.1% | Q3 EPS Growth: 97.1%
Q3 Revenue Growth: 52.8% | Q3 EPS Growth: 34.2%
Q2 Revenue Growth: 28.1% | Q2 EPS Growth: 19.5%
Q3 Revenue Growth: 13.8% | Q3 EPS Growth: -6.2%
Q2 Revenue Growth: 50.1% | Q2 EPS Growth: 14.3%
Q3 Revenue Growth: 21.6% | Q3 EPS Growth: -113.9%
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,
Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.
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