Organic Garage is a buy, says eResearch

With industry tailwinds blowing in its favour and a distinct competitive advantage, Canadian independent grocer Organic Garage (Organic Garage Stock Quote, Chart, News TSXV:OG) gets a “Buy” rating from eResearch analyst Chris Thompson, who launched coverage of the stock on November 11. Thompson said the company checks multiple boxes for consumers and that the valuation gap between OG and its industry peers should narrow over time.

Incorporated in 2005 and with its first store opening the following year, Organic Garage currently has four organic and natural product grocery stores in Toronto and Southern Ontario along with a 40,000-sq-ft distribution centre in Etobicoke. In 2016, Organic Garage merged with Crestwell Resources and completed a four-for-one share consolidation and relisted on the Venture Exchange in April 2017 under the OG symbol.

The stock has been stuck around the $0.10 mark for the past year after drifting down from $0.30 over the course of 2019. Thompson sees upside, however, as has put a price target of $0.30 on OG, which at the time of publication represented a projected 12-month return of 63.3 per cent.

In his coverage initiation report, Thompson pointed to the big bump received by grocery during the COVID-19 pandemic as people are buying more food at grocery stores to suit their work-from-home lifestyles. But the analyst says Organic Garage’s pluses go beyond the pandemic.

“Its ability to efficiently source organic products allows it to pass along the savings to customers. Its store concept checks multiple boxes with today’s food customer: healthy food, good value, small store convenience, and an overall premium shopping experience,” Thompson wrote. “Being an independent retail grocer, Organic Garage sets itself apart from its national competition, which has allowed it to compete alongside larger national brands. The Company brand holds itself to high-quality standards while fitting customers’ expectations of costing less than the rest of the organic grocer competition.”

“With the upswing in food retail due to the stay-at-home measures from the current COVID-19 health crisis, Organic Garage recognized revenue increases in the past two quarters of 19 per cent and 29 per cent year-over-year. We believe this sales trend should continue for at least three more quarters,” he said.

Organic Garage is led by CEO Matt Lurie, who Thompson noted comes from a long line of grocers dating back to the 1930s. Organic Garage won Toronto’s Best Organic Food Store award from the Toronto Start’s Reader Choice magazine in 2019, where over 40,000 votes were cast. The company also won in 2019 the Organic Retailer of the Year award from the Canadian Organic Trade Association along with the Best of Canada’s Sign Industry award for design features at its Liberty Village store.

Organic Garage last reported earnings at the end of September where its second quarter 2020 results saw sales jump by 29 per cent year-over-year to $8.1 million and EBITDA of $0.4 million compared to a loss of $0.4 million a year earlier.

On the company’s progress at the Q2, Lurie said in the press release, “We are extremely pleased with our incredible results from Q2. Along with our 29-per-cent increase in sales, the Company has not only supported our loyal customer base, but also gained increasing market share in comparison to our peers. Additionally, we have achieved remarkable support from our strong on-line sales in order to cater to our customers’ changing purchasing tastes. Management has ensured that our sales margins continue to improve as we focus on our purchasing efficiencies.”

There is a valuation discount with its peers that we believe should lessen as revenue continues to uptick, online sales grow, margins continue to improve, and once the new Leaside store is open.

Thompson said even before the pandemic, the North American food industry had been transforming in a number of ways, including via digital disruption where online grocery sales are expected to increase by more than ten per cent in the US by 2025; a shift from ingredient purchases to more in-store prepared meals, meal kits and delivery of prepared meals; a move to more socially responsible food and the further rise of healthy eating and more customer emphasis on fresh produce and organic and/or natural foods, where Canadian consumers are on track to spend $6.9 billion on organic products in 2020, up from $5.4 billion in 2017 (with market share at 3.2 per cent for 2020), according to the Canada Organic Trade Association.

“While organic and health-conscious products tend to have a higher cost, Organic Garage combats this through sourcing and partnerships. Its ability to price its organic products competitively depends on its ability to build relationships with its product sources and efficiently manage product distribution,” Thompson wrote. “Organic Garage boasts an honest straightforward approach to organic and healthy products and transparency within Organic Garage adds to the Company’s unique feel.”

“The Company’s competitive advantage is in its ability to source its organic products in a cost-effective way. Through its partnership agreements with vendors, Organic Garage is able to get better deals on its organic products. Access to local vendors within the Toronto market also gives it a competitive advantage in sourcing natural products. Customers are attracted to goods produced within their area and are thus able to support the local Ontario farmers,” he wrote.

Thompson sees a valuation discount between OG and its peers, where he estimates the stock to be trading at 0.5x fiscal 2021 Enterprise Value/Revenue and 6.8x EV/EBITDA compared to the overall Canadian Food Grocer Industry averages for calendar 2020 of 0.9x and 9.3x, respectively.

“There is a valuation discount with its peers that we believe should lessen as revenue continues to uptick, online sales grow, margins continue to improve, and once the new Leaside store is open,” Thompson said.