It's a familiar story -- an Alberta business that's growing rapidly, looking for acquisitions wherever it can and boosting distributions ahead of schedule.
The only thing that's missing is oil.
Since its inception in late 2004, Edmonton-based Liquor Stores Income Fund has proven that Alberta is a pretty good place for booze retailing, too. With a strong balance sheet and a record of quick growth, the income trust -- a product of the marriage of two liquor store companies -- is still hungry. And in a highly fragmented Alberta liquor store market, it's moving aggressively to position itself atop the consolidation mountain.
But it won't be easy. With more than 1,000 liquor outlets in the province, Liquor Stores Income Fund is going to have to be selective in picking which ones to go after. Expansion risks are made greater because the trust's opportunities outside the province are limited by complex regulatory hurdles.
"There's nowhere else to go, really," says Irving Kipnes, the trust's president. Because of restrictive licensing rules in Saskatchewan, British Colombia and Ontario, the fund's expansion opportunities outside Alberta are limited to some possible developments on the East Coast and not much else.
Selling booze makes for a good trust business plan, because liquor sales are fairly constant regardless of what the economy's doing.
The Alberta market, however, is still a tough one. When the liquor retailing sector was privatized several years ago, the province introduced stiff regulations to ensure competition, and the number of liquor stores in Alberta soared to more than 1,000 outlets from about 250. Liquor Stores, while the biggest liquor store retailer in Alberta by number of stores, still has only 70 outlets. Even so, the fund's growth is outpacing some analysts' expectations.
"The pace of new store development is a key consideration for our estimates and target price," Clarus Securities Inc. analyst Robert Catellier said in a recent research report, "and the Fund continues to outperform in this regard."
Mr. Catellier said the fund has modest risk. Unlike a number of trusts that recently cut or suspended distributions, Liquor Stores doesn't have much exposure to rising commodity prices, nor does it have U.S. dollar revenue that may be hurt by currency fluctuations.
Liquor Stores Income Fund launched its initial public offering in September, 2004, pricing its units at $10, with a yield of about 10.5 per cent. Today, they trade at $19.90 and yield 6.08 per cent.
When the fund started, it controlled 50 liquor stores. The plan was to expand to about 100 stores within three to five years. Through a series of acquisitions, the fund is about half way toward its goal. And there are plenty of targets left.
"There are about 1,050 stores in Alberta," Mr. Kipnes says. "Of those, there are about 300 to 400 in a size range we'd be comfortable with."
Some analysts predict Alberta's highly fragmented market is ripe for consolidation, and Liquor Stores is well-positioned to benefit.
The trust's strategy is all about growth. Most of its outlets are either Liquor World or Liquor Depot stores. However, it also operates a number of other banners, including Grapes and Grains in Edmonton and Last Call in Fort McMurray.
So far, the Liquor Stores' strategy has focused on buying stores that have strong balance sheets and installing quality management and staff to keep customers coming back. Liquor Stores is also going where the population growth is. The bulk of its stores are in or near Edmonton and Calgary, and urban locations are where it looks first for acquisition opportunities. The trust's operations are primarily in shopping centres with grocery store or other anchor tenants, because Alberta regulations prohibit a grocery store from selling liquor in an attached space.
Indeed, even though the trust puts a lot of effort into product decisions (it employs a full-time certified sommelier), Liquor Stores management is adamant that what separates it from the rest of the pack is a keen knowledge of where to put its stores, rather than what to put in them.
"There's a lot of real estate experience on this team," Mr. Kipnes says. "We know just how important location is."
© The Globe and Mail
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