IPO | “Dynamite is fast fashion on steroids”

“I wouldn’t bet against this entrepreneur,” says portfolio manager Nicolas Chevalier, of the Gestion Pembroke firm.

“He is one of our great entrepreneurs. Not just because of what he did with Groupe Dynamite, but also for what he did as a real estate developer with Royalmount, Quartier DIX30 and the Four Seasons complex. Groupe Dynamite is a great success. Few Canadian retailers have had success in the United States. You can count it on the fingers of one hand,” says the investment expert.

If Andrew Lutfy and his team continue to execute, it is a stock that should do very well on the stock market, according to analyst François Watier of the Van Berkom firm.

“Same-store sales growth and margins are there. Gross margins of 60% and more are very impressive,” adds this small-cap specialist.

“That’s the beauty of retail. When it works and the brand resonates, it’s very profitable. »

The speed at which stocks are being sold is making investment professionals’ eyes widen. The inventory turnover rate is 8x. Concretely, this means that the company sells its stocks every 45 days, while generating very high profit margins, which appears to be exceptional in an industry where a turnover rate of three to four times the stocks is the norm.

“Costco turns its inventory a lot, but its margins are very low. Conversely, Birks keeps its jewelry on its shelves for a long time, but its margins are enormous. Doing both is not easy,” underlines Nicolas Chevalier.

Groupe Dynamite succeeds in particular in reducing the risks linked to the fashion sector thanks to its flexibility and rapid marketing. Approximately 60% of products go from design to distribution center within 9 to 15 weeks, and nearly 30% within a flash lead time of less than 8 weeks.

“It’s extraordinary. It’s fast fashion on steroids,” says François Watier.

The business model is based on manufacturers in Asia able to manufacture quickly at low cost, he specifies.

The operational level is incredible, notes Philippe Côté, portfolio manager and director of research at Eterna Investment Management. “They are rarely caught selling stocks at a discount,” he says.

François Watier says that Gap was doing in the 1990s what Dynamite is able to do today, which is to say sell a lot of clothes at full price.

“When you start to have excess inventory and you have to do liquidations, the brand loses a little of its luster, and all of a sudden, the $35 sweater goes to $22, and the margin goes from 60% at 38%. It’s the vicious circle of fashion. »

Inventories are managed very tightly and this explains the high stock turnover rate, says Nicolas Chevalier. “Andrew Lutfy would rather lose a sale than have to sell clothes. This is what sets Dynamite apart from many other retailers. »

A big question is whether customers will still be eager to shop at Dynamite and Garage stores in 10 years.

“It’s not an easy business. But Andrew Lutfy did it. He has a recipe that works, says Nicolas Chevalier. You have to constantly reinvent yourself in this sector. Next year, will it be the blue dress, the black one or the pink one, and what length? And what quantity should you order? »

The experts interviewed by The Press agree that the valuation sought is in a reasonable area due to the possibility of growth, as the company intends to expand further in the United States and internationally.

“The market is vast. The potential is very great,” says Nicolas Chevalier.

Andrew Lutfy is offering to the public a block of 14.3 million shares at a proposed range of $19 to $23 each, giving the company an approximate value of $2.3 billion.

Depending on the initial price that will be set, the valuation sought is equivalent to a multiple of 18 times to 20 times the net profits of the last 12 months.

Portfolio manager Alain Chung at Claret says it’s a very good company that operates very efficiently.

“However, it is not in a segment where a recession and fashion do not affect it. It’s also the kind of company whose stock can go from $20 to $60 because as more stores open, it becomes more and more profitable. »

He expects the stock to perform much like Aritzia, a Vancouver retailer.

In everyone’s interest

It’s been a long time since there was an initial public offering in Quebec. Everyone has an interest in making it work, Andrew Lutfy first and foremost, says François Watier.

“All the major bankers in Quebec are involved in the operation. »

François Watier believes that interest will be there and considers it very possible that the initial price will be set at a value higher than the expected range.

Nicolas Chevalier, for his part, thinks that if Andrew Lutfy agrees to leave a little money on the table for his new partners, that is to say the investors who will buy his shares, the operation should be successful.

“Ultimately, it will be beneficial for the stock and for itself, and it will prevent leaving a bitter taste that could limit the expansion of the valuation multiple after the operation. »

Philippe Côté judges that the moment is favorable for the Dynamite Group, because the growth in same-store sales at 15% is above historical averages for the first six months of 2024, which may be difficult to sustain at the end of the year. future, according to him. He also highlights the excitement of the stock market and the rental leases renewed at advantageous rates during the pandemic which could be renewed upwards eventually.

While the possibility of tariffs imposed by the Trump administration may cause uncertainty surrounding margin expansion, François Watier believes Dynamite can maintain and even increase its gross margin of 60% on a $50 sweater, for example.

“Even with a price increase of $5, or 10%, the sweater remains relatively affordable compared to competitors who sell their sweaters for $150. Dynamite therefore offers an affordable alternative to consumers, an important point to consider in the current context. »