Groupe Dynamite Draws Tepid Investor Interest Post-IPO

In the weeks since Montreal-based retailer Groupe Dynamite (TSX:GRGD, OTCMKTS:GRGDF) started trading on the TSX, its shares have moved sideways, failing to ignite the interest of investors despite being the first Canadian IPO of 2024 and the first since March 2023. 

With the tepid response from investors, you would think the TSX was having a bad year. You’d be wrong. It’s up nearly 23% year-to-date through Dec. 4. If it hangs on to this performance through the end of this month, it will have delivered its best yearly return since 2009.

Usually, I cover a specific set of 30 smaller TSV and TSX Venture stocks that are suitable long-term investments. However, given the magnitude of Groupe Dynamite’s Nov. 21 IPO, I thought I’d give readers my thoughts on the good, the bad, and the ugly of the company and its stock.

Happy Investing.

From Stock Clerk to CEO (the Good)

If you’re founder and CEO Andrew Lutfy, you’ve got $280 million reasons to be happy about the IPO. Lutfy and related shareholders sold 14.3 million subordinate voting shares to the public at $21 each for net proceeds of $280 million. The company itself didn’t receive any proceeds from its IPO.

Lutfy didn’t start the company. 

It was founded in 1975 as The Garage Clothing Company, and its first store opened in the Place Versailles mall in Montreal. He joined in 1982 as a part-time, 18-year-old stock clerk. Two years later, the company opened its first Dynamite store in Montreal’s Carrefour Laval mall. 

In 2002, after taking a more-active role in management, he became the sole owner of the two brands and Groupe Dynamite. Now, 22 years later, it has stores in Canada  — 104 Garage and 81 Dynamite  — and the U.S.  — 109 Garage and 5 Dynamite.

Based on the IPO, the company’s market cap is approximately $2.2 billion, with an enterprise value of $2.64 billion, which includes a net debt of $440 million. The one-time stock room clerk’s equity stake is worth $1.9 billion based on 86.7% of the stock outstanding and 98.5% of the votes. It’s his baby. 

Management is due to report its Q3 2024 results before the markets open on Dec. 17, with an earnings call scheduled for 10:30 ET that morning.

Through the first six months of fiscal 2024 (January year-end), the company’s sales were $428.0 million, 25.7% higher than a year earlier. Same-store sales grew by 15.4%, almost three times the growth in the first six months of 2023.  Neither Factset or S&P Capital IQ show analyst estimates.

Through Aug. 3, it opened 12 new Garage stores in the U.S., closed nine stores, and two were relocated or enhanced. Since February 2022, it’s opened 45 stores (primarily Garage) in the U.S. It’s closed three in the U.S. and 45 in Canada. All closures were done to optimize its retail footprint in both countries. Its operating income was $98.4 million, 126.8% higher than a year ago. 

As TSX-listed retailers go, only a handful have a higher market cap than Groupe Dynamite.      

A Past That’s in the Red (the Bad)

If you look at the company’s balance sheet as of Feb. 3, 2024, you’ll notice that it had an accumulated deficit of $8.6 million in its equity. That means it generated losses in previous years. 

None, however, were in the past three fiscal years. 

 There is no question that its business is firing on all cylinders, which is likely why the company chose to go public now rather than wait for others to lead the way. 

However, lurking under the surface is a past that involves significant losses. 

Here’s Where it Gets Ugly

On Sept. 8, 2020, Groupe Dynamite filed for creditor protection under the Companies' Creditors Arrangement Act (CCAA). It sought bankruptcy protection because of the COVID-19 crisis. 

“This pandemic has created a corporate tsunami,” Lutfy said at the time. “At the end of the day there are many things we control, but unfortunately not the impacts of this global pandemic… Our digital channels have experienced incredible growth over the past six months, but unfortunately not enough to offset empty city centres, and change of consumer needs as a result of work from home policies.”

At the time of filing in 2020, Groupe Dynamite had $357.0 million in liabilities, $192.0 million in assets, $149.4 million in bank debt, $35.6 million in trade and vendor debt, and $6.6 million in outstanding gift cards. 

It emerged from bankruptcy on Oct. 13, 2021, after the Court accepted its Joint Plan of Compromise and Arrangement. The plan called for a dividend payment amounting to 7% of the $112.8 million in claims filed by creditors on Sept. 21, 2021. 

After the dividend, $104.7 million of the debt was initially forgiven. That was considered income for the company’s 2021 fiscal year, which ended Jan. 29, 2021. Ultimately, the allowable claims under the plan were reduced to $100.7 million. As a result, its $104.7 million debt forgiveness was decreased by $12.2 million in fiscal 2022 to $92.6 million. 

Since emerging from bankruptcy, the company has seemingly recovered from the losses from COVID-19. We’ll know more after it reports Q3 2024 results. 

Bottom-Line Verdict

I have three issues with Groupe Dynamite past actions and what investors should make of those. 

First, its prospectus doesn’t show all the financials before Covid. As of Jan. 31, 2021 (fiscal 2020, during Covid), the company's accumulated deficit was nearly $143 million. 

Did it lose all $143 million in fiscal 2020? It doesn’t say. 

From its same-store sales data, we know that they declined 7.0% in fiscal 2018 and gained 5.9% in fiscal 2019. However, that gain was weak compared to the year before. Again, nothing from 2020. 

As mentioned earlier, its liabilities were nearly double its assets in September 2020, when it filed for bankruptcy protection. It’s possible the accumulated deficit was generated entirely in fiscal 2020. However, I can’t say for sure.

A second concern involves three financial transactions between the company and Lutfy’s 10644579 Canada Inc.

• On Nov. 10, 2022, about a year after emerging from bankruptcy protection, the numbered company received $185 million in dividends.

• At the same time, the company loaned $110 million to the numbered company at prime plus 1.85% (6.7% as of Aug. 3, 2024).

• In May 2022, the company loaned the numbered company $60 million. Lutfy’s holding company repaid the promissory note with $60 million of the $185 million in dividends. 

Effectively, the company gave Lutfy $235 million in dividends and loans at a time when it was still executing its transformation plan that it started in fiscal 2019, and unfinished due to Covid losses and year-long bankruptcy proceedings from September 2020 to October 2021.

Why?

Lastly, based on its enterprise value of $2.64 billion and projected fiscal 2024 revenue of $1.0 billion (25% growth over a year ago), its EV-to-sales ratio is 2.6x. 

As of September, apparel rival Aritzia’s (TSX:ATZ) trailing 12-month sales were nearly 2.5x greater than Groupe Dynamite's. Yet, according to S&P Global Market Intelligence, its EV/sales ratio is 2.5x despite its share price doubling over the past year. 

Groupe Dynamite is NOT in the same league as Aritzia, not by a longshot. 

I recommend investors avoid Groupe Dynamite stock. You should be able to buy it for less in 12-18 months. 

 Until next time. 

Disclaimer: The author did not hold a position in any of the securities mentioned above. The information provided in this article is for educational and informational purposes only and should not be construed as investment advice. Always conduct your own research or consult with a licensed financial professional before making any investment decisions. Past performance is not indicative of future results.

Will Ashworth is currently ranked 104 out of 30,238 financial bloggers analyzed by TipRanks, with a 17.6% return on his buy and sell ratings. He is one of the founding contributors to this newsletter. 

Will has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.