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High yield, but stock's turnaround may take time

Investors looking for a beaten down stock with a high dividend yield in a stable sector are considering the turnaround story at Liquor Stores N.A. Ltd., but it could be months before they toast its performance.

Shares of the Edmonton-based company, North America's largest publicly traded liquor retailer whose banners include the Liquor Depot, Liquor Barn, and Wine and Beyond, are down more than 40 per cent over the past year amid weak same-store sales growth. Increased competition and regulatory uncertainty in some markets are also weighing on the shares.

Liquor Stores, which operates 242 retail locations in Alberta, British Columbia, Alaska and Kentucky, has a recovery plan in place to drive future growth. The so-called "seven-point plan" includes strengthening its management team, a new customer loyalty program, and renewed sales and marketing strategies that include an expanded presence on social media.

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Analysts say the reinvestment in the business is necessary, but that it could take several quarters before investors see a payoff in the share price.

"It's stuff that makes sense, it will just be a drag on margin and profitability for the next couple of years," said National Bank Financial analyst Trevor Johnson.

He recently downgraded Liquor Stores to the equivalent of a "sell" and reduced his price target to $10, which is slightly below where the stock is currently trading.

Liquor Stores shares hit a five-year low of $9.86 earlier this month after the company reported flat first-quarter sales and lower margins. It blamed a late Easter, which fell in the second quarter instead of the first quarter last year, as well as bad weather and product discounts for the result, which were below analyst expectations.

The stock had already been under pressure as investors worry about pending changes to B.C.'s liquor-selling landscape. The provincial government said in February that it supports the sale of liquor in grocery stores, which some see as added competition risk for Liquor Stores.

RBC Dominion Securities analyst Sabahat Khan has a "sector perform" on the stock, which is similar to a "hold," and recently reduced his target to $12 from $14.

"The company continues to make progress on its strategic plan, which we believe, upon completion, will strengthen LIQ's operating capabilities and improve profitability," Mr. Khan said in a note, referring to the company's stock symbol.

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However, he too said the plan would take a couple of years to show results.

"There will be a little pain as we transition and transform the business into a growth retail company," Liquor Stores chief executive Stephen Bebis said in an interview on Monday. "We've told our shareholders that, to hang in there. We have some good things coming up. We are starting to see some good performance from our initiatives."

Some investors worry the company's dividend, which currently yields about 10 per cent, could be in jeopardy as it faces slow same-store sales growth and reinvests in the business.

Mr. Bebis said the dividend is safe.

"We don't even really consider it at this point. It's business as usual," he said.

PI Financial analyst Sheila Broughton has a "buy" on the stock, but recently lowered her target to $14 from $17, citing the costs of the turnaround plan.

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She believes the company will see growth in the meantime, driven by improved operations at its existing locations and the addition of new stores.

"We believe LIQ has a good operation platform and geographic footprint to build on," she said in recent note.

Liquor Stores currently has 173 stores in Alberta, 35 in B.C, 22 in Alaska and 12 in Kentucky. It opened one new store in Alberta in April and expects to open five more stores this year and seven new stores in 2015, mostly in Canada.

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About the Author

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More


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