Sears Canada Inc. (TSX:SCC) posted a 125.6% net loss in Q3 2016 as compared with the same quarter in 2015, according to their latest financial statement located in their Third Quarter Report.

In an email exchange, however, Jim Danahy, CEO of CustomerLab, says this net loss “this is not a one quarter blip”, and this recent decline has been a long time coming.

But, there are many notes at the beginning of the Management Discussion and Analysis document that account for this loss within the last two years in the same quarter. Vincent Power, Vice-President of Corporate Affairs and Communications at Sears Canada emphasizes that these notes are “in themselves cautionary notes, highlighted as potential risk factors that are put in every statement”.

A few factors among these cautionary notes indicate that Sears Canada failed to innovate in the face of change.

In November 2015, Sears Canada lost their ten-year agreement with JPMorgan & Chase and as a result offered many promotions for customers before the contract ended. Since Sears Canada’s finance company changed to Easyfinancial and its parent company GoEasy, the promotions that Sears Canada offered in the third quarter of 2015 were not available in 2016’s Q3, accounting for a greater net loss when both Q3s are compared with each other, said Power. As such, in 2016’s Q3 there were was less incentive to purchase big ticket items such as appliances, and charge it to the Sears Card to avail of promotions.

Tied into the loss of the Sears credit card backed by JPMorgan and Chase was changes to the Sears Club program, another factor to account for the net loss in 2016’s Q3 as compared with the same quarter in 2015. Under the previous card, enrolment in the Sears Club loyalty program was automatic when a customer applied for the card, and when they used the card at Sears or at other retailers. Under the new financing program, Sears Club became a stand alone program that a consumer had to enroll, independently, thus resulting in the inability to attract and retain customers in the loyalty program.

Ken Wong, Associate Professor & Distinguished Professor of Marketing at the Smith School of Business at Queen’s University unpacks the lack of innovation with regards to the Sears Club program. With a loyalty program a company can “track future purchases based on past purchases” and if fewer customers are active and loyal to the program, this doesn’t give Sears Canada any “market research or individual customer data on how to move forward”.

Their Third Quarter Report also mentions their their delay in moving their catalogue customers online, and also the delay in developing and implementing their e-commerce platforms. With their catalogue legacy, in place since 1953, Sears Canada had the infrastructure set up to move seamlessly to e-commerce, as they already had the environment where consumers didn’t have enter the brick and mortar store to buy their goods – they could buy from home, have the product shipped directly to their home or even pick up in store.

Wong articulates that “catalogue business is the kissing cousin of e-commerce. Sears was positioned for greatness in the world of e-commerce and online shopping. All they had to do was automate, and they didn’t”.

Power also mentions their loyalty to their catalogue customers, but highlights these clients tend to fit an ‘older demographic of empty nesters’, who may not need to by big ticket items like appliances with the same frequency as young families who are in the process of building a home, and shopping online.

Sears Canada’s Third Quarter Report for 2017 will be released on October 21st, 2017.

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Nalcor’s comeback financial statement uses uncommon and potentially questionable reporting methods, according to Ottawa accountant John Wright

A provincial energy corporation in Newfoundland and Labrador appears to be making a comeback after losing $19 million and their entire board of directors in the spring of 2015.

The board of directors was replenished quickly and the company pursued their controversial undertakings at Muskrat Falls despite protests. Although Muskrat Falls is still a work in progress, Nalcor’s financial statement indicates much of their profit has come from investments in new projects, along with lower operating costs and higher oil production.

The third quarter financial statement indicates that during the first three months of 2016 the company made $38.7 million more than they did during the same period in 2015. This quick turn-around was accounted for in both financial charts and subsequent explanatory paragraphs in the report.

According to the report, one of the primary factors contributing to the company’s financial resurrection is a reduction in operating costs. The outline in the statement says the increase to $80.9 million in operating cost revenue over the first nine months of 2016 compared to $20.3 million for the same period in 2015 is due to “lower salary and benefits expenses, professional fees and system equipment maintenance.”

These figures are represented with a superscript number one next to them, indicating more information in a footnote. The note says the numbers are recorded using uncommon accounting techniques, known as non-generally accepted accounting principles.

These methods are cause for raised eyebrows according to John Wright, senior accountant at Vaive and Associates Firm in Ottawa. Wright says these methods of financial reporting are uncommon for a reason. “If someone came to me with a non-GAAP statement, we would have to look at it very closely to find out why they used them and what it means before we made any conclusions,” Wright says.

Although they can be used for tax evasion purposes, says Wright, it generally creates more work for the company in the long run since they have to produce two financial reports. This makes it an uncommon and undesirable practice.

Nalcor officials decline to comment on the matter.

Overall, Wright cautions “don’t trust them.”

The other factors contributing to the company’s increased revenue are all recorded using common practice. Oil production for Nalcor’s third quarter brought in almost $1.5 trillion compared to the previous year’s $299 billion. This increase is due primarily to the company’s ability to purchase oil at a lower price per barrel during 2016, coupled with increased production during the year. These two aspects allowed the company to produce more for less, and to soak in the financial benefits of such.

The statement also says the company recovered lost revenue through higher customer rates for services. They outline this practice as an ‘entitlement’ in the statement.

Finally, the increase in revenue for 2016 is also attributed to the company’s decision to increase investments in hydro projects. Nalcor has a number of sister companies across the east coast of Canada including Emera which recently announced the initiation of the Atlantic Link Transmission Project – a 350-mile submarine that will deliver energy to New England. New projects such as this provide the company initial income through deal-making and the promise of additional income with the completion of the project.

In a November 2016 press release, Nalcor’s CEO Stan Marshall said “Nalcor’s financial position is very sound… We are focused on getting back on track and completing as much work as possible before the onset of winter.”

Emera Stock Chart by chantalbacchus on TradingView.com

The Potash industry is not faring very well these days. The biggest Potash mining company in the world lost 934 billion of its revenue in the past 12 months. Considering that Potash Corp. made roughly 1,27 billion in December 2015 as opposed to 336 million in the same month of 2016.

Potash Corporation Stock Prices– Past 5 Years by flor.bonneville on TradingView.com

This substantial loss of revenue sounds alarming. More than 400 people lost their jobs at Potash Corp in 2016. Many are worried about the potash industry in Canada.

However, the trend seems to be constant throughout the whole potash mining industry.

When companies experience losses of capital, the first question to ask is whether the reason for the loss comes from inside the company. That is to say: “Was there a strike?” or “Did the company lose a major client?” If the answer to one or the two of these questions is yes, then there is an internal reason for the loss of money.

Professor Shantanu Dutta teaches finance at the University of Ottawa. He says that in the case of Potash Corp, an internal reason for the plummeting of net income does not apply. “This is probably not internal”, he says.

Effectively, the company did not experience a strike in the past year, and it has not lost that many sales. Potash Corp lost 33 per cent of its sales in China from 2015 to 2016, but not because it lost a client, but because the demand was lesser.
The sales have not fluctuated much in the past three years. In fact, Potash Corp’s sales increased from 2015 to 2016.

The internal changes are not significant enough to create a 75% crash in the company’s revenue over twelve months. The sales have not fluctuated much in the past three years. In fact, Potash Corp’s domestic sales increased from 2015 to 2016 of 21%.

We thus have to turn to the external factors affecting the company.

The external factors one needs to consider when analyzing a company’s money loss are competitors increasing their own shares of the market and the cyclical turn of the market.

Journalist Ian McGugan of the Globe and Mail has written many stories about the potash industry. He says that the huge loss experienced by Potash Corp is “all about the plunging price of potash”. Indeed, the price of potash has crashed of half its value on the stock market within the past five years.

McGugan says that the plunge of the price of potash “reflects growing supply”. Which means that the top five markets bought more potash for the same price as in previous years, therefore decreasing their demand for the subsequent years.

All in all, things are not looking good for the potash industry in the coming years. BMO analyst Joel Jackson writes that “few expect better” in the potash industry. Jackson writes that the question is whether the market will crash even more in the coming years.

However finance expert Shantunu Dutta says that there are always fluctuations in the natural resources market, because sales can only go so far when the market is driven by nature. It’s a cause and effect chain– if crops aren’t good for the top five market, then the demands will not be so high. Or alternatively, if crops are doing good and clients buy a lot of potash, then those clients will have surplus for a long time.

“It’s a typical situation for the natural commodity industry”, Dutta says. Hopefully, we can expect the return of a healthy potash market in the coming ten years.

(To see the annotations that accompany this financial statement, please click on the “Notes” tab.)

Second Cup is working its way out of a six-year financial deficit under the leadership of President and CEO Alix Box, but the Canadian coffee shop chain still has a long way to go—and a lot of structural changes to make—if it hopes to compete with coffee giants like Starbucks and Tim Hortons.

Box was named CEO of Second Cup in February of 2014 to help revitalize the Second Cup brand, and steer the company back in a profitable direction. Formerly Vice President of Operations, Company, and Licensed Stores with Starbucks Canada, she has a wealth of experience in “achiev[ing] strong growth in sales and profitability” in the coffee shop business according to a 2014 press release. Almost three years later, it appears she has lived up to her reputation: Box’s strategic business plan has reduced the operating loss of the company from over $30 million in September of 2014 to just $25,000 in September 2016.

This upward trend is due in part to Box’s aggressive-but-effective franchising strategy. In a May 2016 press release, Box said that the company is “moving toward an asset-light model,” which means that it intends to close most, if not all, of the company-owned stores in order to focus on supporting the much-more-profitable franchises. Since the beginning of 2014, Box has closed 41 under-performing stores, 18 of which were company-owned. As of September 2016, only 5 per cent of Second Cup’s 298 shops were company-owned. Second Cup says that the closures, along with a 2014 internal restructuring that cut almost a third of the staff at headquarters, should save the company up to $2.3 million annually. Box says this money will be rolled into franchise relations.

Financial analyst Alex Mirhady says Second Cup has “stemmed the bleeding” by closing the money-losing shops, and that a franchise-based model is the company’s best bet at this point. “They know that franchise owners are all independent business owners who are going to work really hard. Their own profit is on the line, versus corporate-owned stores where you have a manager who works for $10 an hour and then goes home. They have a vested interest.”

The reality of this is reflected in Second Cup’s operating margin. From the fall of 2015 to the fall of 2016, the corporate-owned stores cost the company over $700,000. By contrast, the franchise stores showed a net profit of almost $1.2 million. Mirhady says that the move toward franchising is the obvious choice, but that he believes significant financial gains from the decision will take some time to materialize.

“They’ve had to invest a whole lot into renovating their stores, and they have had to pay a lot to close those stores, with severance pay, getting out of leases, and likely selling some property at a deficit,” he says.

But while the company has yet to post any substantial profit, it is getting close to breaking free of its operating loss. Box states in an October 2016 press release that she is “pleased with the significant earnings progress,” and “optimistic that this will continue into the fourth quarter.” The financial statements for the fourth quarter—or winter season—of 2016 have yet to be posted.

But Mirhady believes there is still one major hurdle that second cup will need to face, whether its profit increases or not: that is, the lack of public faith in the company, and resulting plummeting stock prices. “The stock price reflects the expectations of the market for [the business’] future profits. In terms of what the stock market thinks of them… have they really turned the corner yet? I don’t see it.”

Only time will tell if Second Cup can recapture its mantle as one of Canada’s top coffee chains. But for now, it might have to settle for being Fifth or Sixth Cup.

Second Cup Stocks 2014-Present by amberdavison on TradingView.com

Cineplex Inc – Stock Prices on Trading View by mmcewan on TradingView.com

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In its most recent financial statement released Sept.30, entertainment conglomerate Cineplex Inc. reports a record quarter with $44.8 million in media revenue and $376 million in total revenue.

The company anticipates that 2016 will make its best fiscal year to date, projecting over one billion dollars in total revenue.

As Cineplex expands, the question of growth remains. How will the company maintain its revenues moving forward?
Cineplex Inc. is one of the biggest entertainment companies in Canada. With 164 theatres across the country and approximately 77 million customers annually, the motion picture company is dominant in the market.

Through a series of mergers and acquisitions, Cineplex established its prominence over the last decade. Former Canadian entertainment enterprises such as Famous Players, Cinemark, Empire Theatres, and others were subsumed into Cineplex. As of Sept.30, the company reports control over 77.5 per cent of the industry’s market share.

However, in the era of Netflix and online entertainment streaming, the nature of the market has changed. Competition has driven Cineplex to diversify in the shifting media environment.

Exhibition forms the largest source of revenue for the company. Typically, box office sales provide half of the annual revenue. But further and further, the company is expanding its revenues beyond box office and concession sales.

Media revenue has diversified the company’s financial base. In a document accompanying the latest financial report, Cineplex Investors suggests this is achieved through its “wholly-owned advertising business covering everything from onscreen advertising to magazines, online advertising, naming rights and our digital media business, Cineplex Digital Media.”

Simply, media revenue is generated by offering ad space to clients and companies on the wide variety of Cineplex’s platforms. Please click here to review potential ad space.

The effects of diversification have been quick. As indicated, Cineplex’s media revenue was $44.8 million in the latest term, a 30.7 per cent increase from the same period last year.

(To review and compare the recent 2016 financial statement in DocumentCloud, please click on the annotated image below).

Over the last six years, media revenues have steadily increased in the third quarter. In 2011, Cineplex reported a 5.6 per cent decrease in media revenue due to reduced spending in automotive manufacturing. Since then, media revenue has increased gradually from $22.1 million to $44.8 million – a 102.0 per cent increase.

(To review and compare the 2011 financial statement in DocumentCloud, please click on the annotated image below).

Michael McIntyre, an Associate Professor of Finance at Carleton University, notes the increase and confirms the trend. He says that advertising in the theatre is a newer, immature model which dates back only five or ten years. The expansion of the “leisure dollar” beyond box office sales warrants further analysis, he suggests.

As media revenues increased, the recent financial statements include a Media Risk analysis in the Management’s Discussion and Analysis (MD&A). In the assessment, media revenue is stated as being “particularly sensitive to economic conditions” and that any economic changes could impact this revenue source – as noted in the Cineplex Q3 2016 Report.

Additionally, the MD&A states that Cineplex may not be able to replace the revenues created by major media customers if they were lost.

In reviewing the risks, McIntyre says that the company may be viewing the media revenue as a discretionary expense in the MD&A, whereas the revenue and risk could be more substantial:

“It is discretionary in the sense that you can just turn it [advertising] off like a tap. Whether they really can from a business exigency point of view, is debatable.” McIntyre says.

“In a downturn, you’re fighting harder for your customers. So to me it’s quite debatable whether that really is as discretionary as they are eluding to.”

Cineplex is looking to expand further in the North American market, as confirmed by CEO Ellis Jacob in fall press releases.

With its large market share in Canada, McIntyre says that Cineplex may have run out of room to grow domestically. He says it could impact share price and capital in turn if growth “flat lines” and shareholders decide to invest elsewhere. The ways to counter are diversification or expansion, options Cineplex continues to explore.

Cineplex’s media strengths are identified as a strategic corporate priority. Moving forward, the media revenues should be expected only to grow.

The 2016 Cineplex annual report will be released on February 15th, 2017.

Cineplex-Investors did not respond to requests for comment by the deadline.

Rising operating expenses represent Shopify’s commitment to expansion, but in the tech industry only time will tell whether 2016’s acquisitions will correspond to a sustained increase in revenue, experts say.

Shopify’s revenues increased by 91.7 per cent over the last three quarters of their 2016 fiscal year compared to the same period the previous year, according to an analysis of its third quarter results.

But Shopify’s increase in revenue was matched by a 91 per cent increase in total operating expenses. Packaged within that increase is their acquisition of Kit CRM and Boltmade, as well as new Shopify facilities being opened in Toronto and Waterloo.

Together, an 88.5 per cent increase in sales and marketing, a 90.5 per cent increase in research and development and a 101.2 per cent increase in administrative expenses resulted in a subsequent 147.9 per cent rise in loss from operations over three quarters ending on Sept. 30, 2016.

A near-doubling of all operating expenses is characteristic of a tech corporation hoping to develop an advantage over its competitors, says Dr. Ian Lee, who specializes in strategic management and international business at the Sprott School of Business at Carleton University.

“I wouldn’t be worried about net loss in the tech industry as long as revenue is increasing and they are creating value for customers and shareholders,” Lee said.

Shopify’s net loss grew by 112.2 per cent over three quarters in 2016 compared with net loss recorded from the same period in 2015.

However, rising net losses haven’t affected investor confidence in the e-sales platform, who went public on the New York Stock Exchange in 2015. In May 2015 Shopify’s stock was valued at just over $20 a share. As of Feb. 3, it stands at $52.12 a share.

Chart representation of Shopify’s share price since IPO on NYSE. by AndrewSavory on TradingView.com

Lee believes that Shopify’s rising share price lends itself to their ability to create value for customers and to differentiate themselves from new entrants into the e-commerce market.

Shopify has made a growing investment in research and development mainly through acquisitions like Boltmade, a product design firm intended to “accelerate the development of the Shopify Plus product offering,” according to a Shopify press release.

Shopify Plus was launched in 2014 to help the core of small and medium sized businesses deal with a higher volume of sales. The mobile application has grown to service over 1,000 merchants and has helped Shopify separate itself from competition and is part of the 119.7 per cent increase in revenue generated from merchant solutions between three quarters ending in 2016 and 2015.

Value in the tech industry is largely dependent upon innovation, but Dr. Alejandro Ramirez believes that Shopify is well-positioned for future success, despite rising operating costs and the cost of recent acquisitions.

“More businesses are realizing they need to be available online an mobile through apps. Shopify sells you a presence that is accessible and easy to use for customers. They have a large hand in that market,” said Ramirez, who teaches about emergent information technologies and social software at the Sprott School of Business.

“The moment in which total operating expenses exceeds revenue, then you have a problem.”

Shopify’s revenues increased by 88.6 per cent in the third quarter of 2016, which as evidenced by an analysis of the company’s most recent third quarter, is 1.1 per cent higher than the 87.5 increase in total operating expenses for the same period.

Ramirez cautioned that Shopify’s success will depend on whether they can maintain a positive differential between revenues and expenses while awaiting a potential sustained increase in revenue and reduced operating costs resulting from recent acquisitions like Boltmade Kit CRM.

Regarding the short and long term financial impact of recent acquisitions, Samantha Tam, a Shopify media representative, declined to provide comment on operating expenses and said “opinion based or qualitative statements cannot be provided until mid-February.”

Shopify’s annual report will be released on February 15, 2017.