Unit 5. North-West Company - Analysing Financial Performance

t
os
W16688
NORTH WEST COMPANY: ANALYZING FINANCIAL PERFORMANCE1
rP
Jennifer Alex, Mark MacIsaac, and Neil Maltby wrote this case solely to provide material for class discussion. The authors do not
intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names
and other identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
yo
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.
Copyright © 2016, Richard Ivey School of Business Foundation Version: 2016-10-26
It was June 2015, and Angela Robinson sat at her desk and contemplated the work in front of her. Robinson
op
had graduated from university in May, and had been hired by an investment fund company as a junior
analyst. Her company invested in portfolios of equity securities, and Robinson’s new job required her to
review the financial performance of potential investment targets, and make a recommendation to a senior
analyst. The senior analyst to whom she reported would review her performance reports and, depending on
the results, would either reject the company as an investment candidate or proceed to the next phase of
analysis. The first company Robinson had been tasked to review was the North West Company Inc. (NWC).
tC
As Robinson looked over NWC’s 2014 annual report (see Exhibits 1–3 for selected financial information),
she considered how to approach her analysis. She needed to thoroughly assess NWC’s past financial
performance; this would impact her company’s decision on whether to proceed. In particular, Robinson
wanted to assess NWC’s profitability from both its Canadian and international operations. She also wanted
to assess NWC’s financial structure, because this would provide an indication of whether and how future
expansion could be financed.
No
THE NORTH WEST COMPANY
With roots that could be traced 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.2 Operating under banners such as Northern, NorthMart, Giant Tiger,
Cost-U-Less, and AC Value Centers, NWC reported total sales of CA$1.6 billion in 2014.3 This sales figure
Do
was reached through serving remote communities, which involved adapting to the local market preferences
1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of The North West Company Inc. or any of its employees.
2
“A Time to Invest: The North West Company Inc., 2014 Annual Report,” North West Company, 9, accessed August 9,
2016, www.northwest.ca/content/annual_filings/2014_YE_-_Annual_Report_-_APR9-15.pdf.
3
Ibid., 33; all currency amounts in the case are in CA$ unless otherwise specified.
This document is authorized for educator review use only by ISAAC RANDA, Polytechnic of Namibia until Oct 2023. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
Page 2 9B16B017
t
and cultures, high shipping costs, and selling to a population with income that was lower than the national
os
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.4 NWC chose to
keep the chain of stores operating under the existing name: AC Value Centers. This move allowed NWC
rP
to use the Alaska Commercial Company’s existing distribution networks and relationships, and expand
west into 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. While this
type of retailer was familiar for NWC, the locations were not. Cost-U-Less was found in the Caribbean, the
South Pacific, and U.S. territories. As Edward Kennedy, NWC’s chief executive officer, said, “At first
glance, it may look different from what we do today, but, in fact, it is an exceptional strategic fit with our
capabilities in serving unique, physically distant markets.”5 Twelve years after NWC’s initial push outside
of Canada, international sales accounted for 35.8 per cent6 of NWC’s business.
THE CANADIAN FOOD RETAIL INDUSTRY
yo
In 2013, the Canadian food retail industry was valued at more than $112 billion, and was projected to grow
at a compound annual growth rate (CAGR) of 5.8 per cent over the 2012–2017 period to a total value of
$142.5 billion.7 Hypermarkets (combining a department store and a grocery supermarket), supermarkets,
op
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 Stores, Inc. (Wal-Mart.)8 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. As a result, for many consumers, food retailers had become a one-
tC
stop shopping experience. Besides breadth of product offerings, price and convenience had become
important criteria for consumers, and key drivers of competition among retailers. In recent years, increased
concerns regarding the need for healthy offerings had played a more prominent role for consumers.9
The competition among food retailers was fierce. Pete Luckett, the founder and former owner of Pete’s
Fine Foods, a small retailer of specialty foods in Nova Scotia, referred to rivalry in the industry as an
“onslaught of corporate chains” and a challenge for small independent retailers.10 Competition had
No
intensified in the industry, among both food retailers and non-food companies that were becoming active
in the industry.11 With almost no consumer switching costs and minimal growth in consumer spending in
recent years due to low population growth,12 food retailers experienced increasing pressure on their bottom
line.
4
“History,” NWC, accessed August 9, 2016, www.northwest.ca/about-us/history.php#prettyPhoto[history]/3.
5
“News Release: North West Company Fund to Acquire Cost-U-Less,” NWC, accessed August 9, 2016,
www.northwest.ca/content/news_releases/121.pdf.
6
“A Time to Invest: The North West Company Inc., 2014 Annual Report,” NWC, op. cit., 9.
Do
7
“MarketLine Industry Profile: Food Retail in Canada,” MarketLine, March 2013.
8
Jamie Sturgeon, “Here’s Who’s Really Winning Canada’s Grocery Wars,” Global News, November 19, 2014, accessed
August 9, 2016, http://globalnews.ca/news/1678970/heres-whos-really-winning-canadas-grocery-wars.
9
“MarketLine Industry Profile: Food Retail in Canada,” op. cit.
10
“Pete Luckett: It Was the Right Time to Sell,” Canadian Grocer, November 3, 2015, accessed August 9, 2016,
www.canadiangrocer.com/top-stories/pete-luckett-is-was-the-right-time-to-sell-59226.
11
“Grocery Retailers in the US,” Euromonitor, January 2016, accessed August 9, 2016, www.euromonitor.com/grocery-
retailers-in-the-us/report.
12
Sturgeon, op. cit.
Page 3 9B16B017
t
FOOD RETAIL IN NORTHERN CANADA
os
Whereas rivalry amongst competitors and consumer choice defined the mainstream Canadian market, food
retail in Northern Canadian markets was characterized by limited offerings, high prices, and few
competitors. As of the beginning of 2012, remote markets were served by seven northern retailers. NWC
had 127 grocery stores across Northern Canadian, while Arctic Co-operatives Ltd. had 31 stores. According
rP
to The Globe and Mail, stores could order groceries in bulk by sea or winter road, but many items were
transported by air. Given the transportation distances to remote areas and the small populations served, as
well as high operating costs, the price of food was much greater than in mainstream markets. In its survey
of food prices for a basket of assorted goods, The Globe and Mail determined that $113.99 worth of
groceries in mainstream Canadian markets would cost $219.90 in northern markets.13
Such discrepancies led to growing concerns over the viability of communities in the north, particularly Inuit
yo
communities. In 2013, Leesee Papatsie’s “Feeding My Family” campaign aimed to raise awareness about
the price of food and highlighted ethical issues related to food retail in northern markets.14 In 2011, the
federal government revised a subsidy program, entitled “Nutrition North,” to offset high prices for 103
remote communities, though this was focused on transportation costs and not on the costs of labour,
building and maintenance, and electricity.15 According to Michael McMullen, NWC’s executive vice
president of Northern Canada retail, most of the price was related to the cost of doing business, such as
transportation costs, storage space, and inventory levels.16 While the Nutrition North program subsidized
reduced food costs, this only applied to items that were on the eligibility list. As such, gaining healthy,
op
affordable food was a challenge for consumers, communities, and companies alike.
FOOD RETAIL IN UNDERSERVED U.S., CARIBBEAN, AND SOUTH PACIFIC MARKETS
NWC’s U.S. operations focused on Alaska, which shared many market similarities with the Canadian
tC
North. Overall, the U.S. food retailing channel was expected to post a CAGR of 1 per cent at constant 2015
prices, driven by higher food prices rather than an increase in purchasing.17 Wal-Mart, with its dominant
position in the hypermarket channel, was expected to continue expansion through its Wal-Mart
Neighborhood Market and Wal-Mart Express formats. The health-oriented segment, including retailers like
Whole Foods, was expected to remain the fastest growing. Consequently, mid-market retailers felt
competitive pressures both from hypermarkets, where customers went for lower-priced staple products, and
premium providers.
No
NWC’s expansion into the South Pacific and the Caribbean was similar to that of other players expanding
into emerging markets. Companies often entered emerging markets through franchise partnerships with
local operators, or through acquisitions of local players. While this approach was partially due to local
legislative requirements regarding foreign direct investment, it also allowed retailers from developed
countries to expand internationally as local retail infrastructure was modernized.18
13
Ingrid Peritz, “Speaking Out Against $600-a-Week Grocery Bills,” The Globe and Mail, January 12, 2015, accessed
February 16, 2016, www.theglobeandmail.com/news/national/the-north/why-is-food-so-expensive-in-nunavut-shop-for-
Do
yourself-and-find-out/article15915054.
14
Ibid.
15
Ibid.
16
Lauren Strapagiel, “Nunavut Food Prices: Poverty, High Costs of Northern Businesses Leave Some Inuit Unable to Cope
with Expenses,” The Huffington Post, June 11, 2012, accessed February 16, 2016,
www.huffingtonpost.ca/2012/06/11/nunavut-food-prices-protest-inuit-poverty_n_1588144.html.
17
“Grocery Retailers in the US,” op. cit.
18
“Emerging Markets: Overview and Growth in Opportunities in Grocery Channels,” Euromonitor, September 2014, accessed
August 9, 2016, www.euromonitor.com/emerging-markets-overview-and-growth-in-opportunities-in-grocery-channels/report.
Page 4 9B16B017
t
os
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 its “strategic priorities aimed at solidifying and
rP
growing market share within top markets and product and service categories.”19 These priorities involved
plans for 12 communities in Northern Canada, as well as focusing its non-food offerings in areas such as
baby and children’s products, large-pack size, and automotive, and its food offerings in categories such as
produce and meat.20 NWC wanted to tailor its offerings to the unique communities, overhaul selected
existing stores, and foster community relationships. According to The Winnipeg Free Press, “The company
plans to spend another $65 million this year and $150 million over the next three years—Kennedy said
NWC is open to acquiring another retail operation or maybe even a wholesale/distribution operation.”21
yo
CONCLUSION
Robinson reviewed NWC’s financials, and the industry and competitive financial information she had
already researched (see Exhibit 4). Her report would need to include an assessment of NWC’s profitability,
liquidity, and financial structure. Robinson was particularly interested in NWC’s international operations;
although international expansion held with it the potential for significant revenue growth, Robinson
op
wondered whether the profit potential was as great as that of NWC’s operations in Northern and Western
Canada. Robinson also knew that if NWC did choose to expand its international operations, it would require
significant capital investment. She wondered whether NWC could take on additional debt to finance such
a venture.
tC
No
Do
19
“A Time to Invest: The North West Company Inc., 2014 Annual Report,” NWC, op. cit., 6.
20
Ibid., 6.
21
Murray McNeill, “North West Company Shifts into Expansion Mode,” The Winnipeg Free Press, June 11, 2015, accessed
March 2, 2016, www.winnipegfreepress.com/business/north-west-company-shifts-into-expansion-mode-306882151.html.
Page 5 9B16B017
t
EXHIBIT 1: FIVE-YEAR SUMMARY OF SELECTED NWC FINANCIALS
os
Fiscal Year ($ in Thousands) 2014 2013 2012 2011 2010
Consolidated Statements of Earnings Financials
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
rP
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—Total operations 137,838 138,336 133,717 125,881 125,764
Net earnings 62,883 64,263 63,888 57,961 69,656
Consolidated Balance Sheets 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 and other liabilities 244,787 138,334 164,960 215,206 144,736
Equity 329,283 322,440 296,250 283,709 286,475
yo
Other Retail Metrics 2014 2013 2012 2011 2010
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— 1,422 1,386 1,375 1,466 1,445
Canadian stores
Selling square feet (000s) end of year— 676 696 660 655 654
International stores
op
Sales per average selling square foot— $742 $741 $ 734 $702 $682
Canadian
Sales per average selling square foot— $849 $767 $ 716 $713 $718
International
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
Note: EBITDA = earnings before interest, taxes, depreciation, and amortization.

tC
Source: Adapted from “A Time to Invest: The North West Company Inc., 2014 Annual Report,” North West Company, accessed
August 9, 2016, www.northwest.ca/content/annual_filings/2014_YE_-_Annual_Report_-_APR9-15.pdf.
EXHIBIT 2: SELECTED FINANCIALS FROM NWC’S CONSOLIDATED STATEMENTS OF EARNINGS

($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended
January 31, 2015 January 31, 2014
No
Sales 1,624,400 1,543,125

Cost of sales (1,160,182) (1,088,071)
Gross profit 464,218 455,054
Selling, operating, and administrative expenses (366,752) (354,994)
Earnings from operations 97,466 100,060
Interest expense (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
Do
Basic 1.30 1.33

Diluted 1.29 1.32
Weighted Average Number of Shares Outstanding (000s)

Basic 48,432 48,413
Page 6 9B16B017
t
EXHIBIT 3: SELECTED FINANCIALS FROM NWC’S CONSOLIDATED BALANCE SHEETS ($ IN
os
THOUSANDS)
January 31, 2015 January 31, 2014
Current Assets
Cash 29,129 22,353
Accounts receivable 72,506 70,527
rP
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
yo
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
op
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
tC
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 & Equity 724,299 670,512
No

Do
Page 7 9B16B017
t
EXHIBIT 4: SELECTED LOBLAW COMPANIES LIMITED AND INDUSTRY FINANCIAL RATIOS
os
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
rP
Return on sales (%) 0.10 1.90 1.40–3.50
Earnings growth (%) -91.50 -41.00
Return on equity (%) 0.40 9.00 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
yo
Source: Created by the case authors using Loblaw Companies Limited, Reshaping Retail: Loblaw Companies Limited 2013
Annual Report, accessed September 1, 2016, http://s1.q4cdn.com/326961052/files/doc_financials/2013/Loblaw_2013_AR_
EN.pdf; Loblaw Companies Limited, Innovation & Execution: Loblaw Companies Limited 2014 Annual Report, accessed
September 1, 2016, s1.q4cdn.com/326961052/files/doc_financials/2014/655210_Eng_LR_v001_h33m0e.pdf; “Grocery
Stores Industry,” CSIMarket, Inc., accessed August 9, 2016, http://csimarket.com/Industry/industry_growth_rates.php?
rev&ind=1305; “Industry Income-Expense Statements,” BizStats, accessed August 9, 2016, www.bizstats.com/corporation-
industry-financials/retail-trade-44/food-beverage-and-liquor-stores-445/food-and-beverage-stores-445115/show; “Industry
Center—Grocery Stores,” Yahoo! Finance, accessed August 9, 2016, http://biz.yahoo.com/ic/734.html; “Supermarket Facts,”
Food Marketing Institute, accessed August 9, 2016, www.fmi.org/research-resources/supermarket-facts; “Supermarkets &
Grocery Stores,” The Retail Owners Institute, accessed August 9, 2016, http://retailowner.com/Benchmarks/Food-and-
op
Beverage-Stores/Supermarkets-Grocery-Stores.
tC
No
Do

Unit 5. North-West Company - Analysing Financial Performance

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Unit 5. North-West Company - Analysing Financial Performance

Uploaded by

Copyright:

Available Formats

t

NORTH WEST COMPANY: ANALYZING FINANCIAL PERFORMANCE1

Copyright © 2016, Richard Ivey School of Business Foundation Version: 2016-10-26

THE NORTH WEST COMPANY

THE CANADIAN FOOD RETAIL INDUSTRY

FOOD RETAIL IN UNDERSERVED U.S., CARIBBEAN, AND SOUTH PACIFIC MARKETS

Note: EBITDA = earnings before interest, taxes, depreciation, and amortization.

EXHIBIT 2: SELECTED FINANCIALS FROM NWC’S CONSOLIDATED STATEMENTS OF EARNINGS

Sales 1,624,400 1,543,125

Basic 1.30 1.33

Weighted Average Number of Shares Outstanding (000s)

Share capital 167,460 166,069

August 9, 2016, www.northwest.ca/content/annual_filings/2014_YE_-_Annual_Report_-_APR9-15.pdf.

You might also like