NWC Case study

Robinson was employed as a junior analyst by an investment fund business after graduating from college in May. Robinson's new position required her to evaluate the financial performance of possible investment targets and provide a recommendation to a senior analyst. Her firm invested in portfolios of equity securities. She reported to a senior analyst, who would analyze her performance report and, based on the findings, either reject the firm as a potential investment or move on to the next stage of analysis. The North West Company Inc.

Robinson perused the NWC 2014 annual report (see Exhibit 1-3 for a summary of the financial data). She had to carefully evaluate NWC's historical financial performance since it would affect her company's choice of whether to move forward. Robinson was especially interested in evaluating NWC's profitability from both its Canadian and international businesses. In order to determine whether and how future development might be supported, she also sought to evaluate NWC's financial structure.

The North West Company

With roots that could be tracked back 350 years , NWC was a growing food retailer that had made a name for itself by operating in markets that other large food retailers tended to avoid. Headquartered in Winnipeg, Manitoba, the company operated retail locations in Western and Northern Canada, rural Alaska, the South Pacific , and the Caribbean. While NWC sold apparel, home goods, and outdoor products, 78.2 per cent of its revenue was attributed to food sales. Operating under banners such as Northern, NorthMart, Giant Tiger, Cost-U-Less, and value Centers, NWC reported total sales of CA$1.6 billion in 2014. This sales figure was reached through serving remote communities, which involved adapting to the local market preferences and cultures, high shipping costs, and selling to a population with income that was lower than the national average.

NWC operated two distinct segments: Canadian and international. While originally based in Canada, in 1992, the company expanded its business by acquiring the Alaska Commercial Company. NWC chose to keep the chain of stores operating under the existing name: AC Value Center. This move allowed NWC to use Alaska, becoming a main food retailer for several remote U.S Communities. After the success of the first international acquisition, NWC continued to grow, and purchased Cost-U-Less in 2007. Cost-U-Less was found in the Caribbean, the South Pacific, and US territories. Twelve years after NWCs initial push outside of Canada, international sales accounted for 35.8 per cent of NWC business.

The Canadian Food Retail Industry

In 2013, the Canadian food retailer industry was at more than $112 billion, and was projected to grow at a compound annual growth (CAGR) of 5.8 per cent over the 2012-2017 period to a total value of $142.5 billion. Hypermarkets (combining a department store and grocery supermarket), supermarkets, and discounters represented 68 per cent of the retail industry, whereas convenience stores and gas stations represented about 24 per cent. As of 2013, Loblaw Companies Limited was the leading food retailer in Canada by sales, followed by Empire Company Ltd. (including Sobeys and Safeway), Metro Inc., Costco Wholesale Corporation, and Wal-Mart, Inc. (Wal-mart.) Many outlets owned by these firms offered a

range of products in addition to food, such as pharmaceuticals, clothing, electronic and household goods, books, flowers, and financial services.

Food Retail in Northern Canada

Whereas rivalry amongst competitors and consumer choice defined the mainstream Canadian market, food retail in Northern Canadian markets was characterized by limited offering, high prices, and few competitors. As of the beginning of 2012, remote markets were served by seven northern retailers. NWC had 127 grocery stores Northern Canadian, while Artic Co-operatives Ltd had 31 stores.

Future Plans

During 2014, NWC management completed a thorough review of its operations and identified areas of the business where it planned to focus its efforts. It defined strategic priorities aimed at solidifying and growing market share within top markets and product and services categories. These priorities involved plans for 12 communities in Northern Canada, as well as focusing its non-food offerings in areas such as baby and childrens products, large-pack size, and automotive, and its food offerings in categories such as produce and meat. The company plans to spend another $65 million this year and $150 million over the next three years.

Conclusion

Robinson reviewed NWC financials, and the industry and competitive financial information she had already researched (see Exhibit 4). Her report would need to include an assessment of NWCs profitability, liquidity, and financial structure. Robinson was particularly interested in NWCs international operations; although international expansion held with the potential for significant revenue growth, Robinson wondered whether the profits potential was great that of NWCs operations in Northern and Western Canada. Robinson also knew if NWC did choose to expand its international operations, it would require significant capital investment. She wondered whether NWC could take an additional debt to finance such a venture.

Exhibit 1: Five Year Summary of Selected NWC Financials

Consolidated Statements of Earnings Financials

Fiscal year $ in thousands	2014	2013	2012	20111	2010
Sales-Canadian Operations	1,042,168	1,022,985	1,043,050	1,028,396	978,662
Sales-International operations	582,232	520,140	470,596	466,740	469,442
Sales-Total	1,624,400	1,543,125	1,513,646	1,495,136	1,448,104
EBITDA-Canadian Operations	100,896	111,225	106,510	97,998	98,781
EBITDA-International operations	36,942	27,111	27,207	27,883	26,983
EBITDA-Totals	137,838	138,336	133,717	125,881	125,764
Net Earnings	62,883	64,263	63,888	57,961	69,656

EBITDA=earnings before interest, taxes, depreciation and amortization

Consolidated Balance Sheet Financials

Current Assets	315,840	299,071	303,896	295,836	284,789
Current Liabilities	150,229	209,738	190,184	128,002	185,377
Long-term Debt & other liabilities	244,787	138,334	164,960	215,206	144,736
Equity	329,283	322,440	296,250	283,709	286,475

Other Retail Metrics

Number of stores-Canadian	178	178	177	183	184
Number of stores-International	47	48	46	46	46
Selling square feet (000s) end of year-Canadian stores	1,422	1,386	1,375	1,466	1,445
Selling square feet (000s) end of year-International stores	676	696	660	655	654
Sales per average selling square foot-Canadian	$742	$741	$734	$702	$682
Sales per average selling square foot-International	$849	$767	$716	$713	$718
Number of employees-Canadian operations	4,921	4,839	4,768	5,233	5,301
Number of employees-International operations	1,726	1,853	1,568	1,668	1,601

Exhibit 2: Selected Financials from NWCs Consolidated Statements of Earnings ($ in Thousands, Except per share amount)

	Year Ended
	January 31,2015	January 31,2014
Sales	1,624,400	1,543,125
Cost of Sales	(1,160,182)	(1,088,171)
Gross Profit	464,218	455,054
Selling, operating, & Administrative Expenses	(366,752)	(354,994)
Earnings from operations	97,466	100,060
Interest Expenses	(6,673)	(7,784)
Earnings before income taxes	90,793	92,276
Income taxes	(27,910)	(28,013)
Net Earnings for the year	62,883	64,263
Net Earnings per share:
Basic	1.30	1.33
Diluted	1.29	1.32

Exhibit 3: Selected Financials from NWCs Consolidated Balance Sheets ($ In Thousands)

	January 31,2015	January 31,2014
Current Assets
Cash	29,129	22,353
Accounts Receivables	72,506	70,527
Inventories	204,812	198,856
Prepaid Expenses	9,393	7,335
	315,840	299,071
Non-Current Assets
Property and Equipment	311,692	286,875
Goodwill	33,653	29,424
Intangible Assets	22,485	21,514
Deferred Tax Assets	28,074	19,597
Other Assets	12,555	14,031
	408,459	371,441
Total Assets	724,299	670,512
Current Liabilities
Accounts payable and accrued liabilities	142,788	128,999
Current portion of long-term debt	6,271	77,800
Income tax payable	1,170	2,939
	150,229	209,738
Non-Current Liabilities
Long-term debt	195,125	105,062
Defined benefit plan obligation	36,556	18,417
Deferred tax liabilities	2,392	2,012
Other long-term liabilities	10,714	12,843
	244,787	138,334
Total Liabilities	395,016	348,072
Shareholders Equity
Share Capital	167,460	166,069
Contributed surplus	2,831	3,528
Retained earnings	140,527	145,762
Accumulated other comprehensive income	18,465	7,081
Total equity	329,283	322,440
Total Liabilities and Equity	724,299	670,512

Exhibit 4: Selected Loblaw Companies Limited and Financial Ratios

	Loblaw		Industry Average
Revenue cost and margin analysis	2014	2013
Revenue growth %	31.60		5.60
Cost Growth %	29.80
Cost as a percentage of sales %	75.20	76.20	74.00
Profitability:
Return on sales %	0.10	1.90	1.40-3.50
Earnings growth %	-91.50		-41.00
Return on equity %	0.40	8.00	18.00-30.00
Earnings per share ($)	0.14	2.21
Solvency:
Current Ratio	1.47	1.43	1.60-1.70
Debt to Equity ratio	1.63	1.96	1.30-1.60

Required:

Based on the particulars provided in the case, prepare a case analysis report using the points below as your guidepost and answer them accordingly:

1. A paragraph describing the companys business model:

• Analyze the company's history, developments, and growth over the period and identify the company's internal strengths and weaknesses and how these have developed over-time (i.e., use SWOT)
• 2. A paragraph outlining the industry in which this company operates, including future prospects.
• Analyse its external environment and how it has aligned itself to this environment (Use Porters Industrys Competitive Analysis Framework to do this)
• 3. Review NWCs financials, and the industry and competitive financial information using the available information focusing on NWCs profitability, liquidity, and financial structure.
• Provide a comparison of financial performance and Credit Worthiness of NWC and Indicators and the industry as well as market based on the case information; include explanation of your choices.
• Comment on whether NWCs international operations profit potential was as great as that in Northern and Western Canada.
• 4. Based on your analyses above, provide a brief forecast of the companys future prospects.
• Using tools like charts, Delphi method, game theory, regression analysis etc. where reasonably possible.
• 5. NWC international operations expansion would require significant additional capital investments. Based on its finances, could NWC take on additional debt to finance such a venture?