I don't think their cash flow drain is due to opening 3 new outlets on the prairies, as I believe those were opened in Q3 or Q4 of last year, so all of the startup cost would have been incurred in those quarters. The first quarter report for 1998 shows $11.7M in cash outflow associated with changes in non-cash working capital items (typically accounts receivable and inventory, less changes in accounts payable). The total cash outflow for the quarter was $12.4M, so virtually all of it was associated with working capital items. Only 1.7M was associated with purchases of fixed assets.
What I do not know is if the cash flow drain is due to some cyclical nature in the business - i.e. they build up inventory in Q1 and Q2 for sales in Q3 and Q4. This may be the case, as between their Q3 1997 report and their year-end 1997 report, GDL reduced their overall cash drain for the year by almost $20M. I don't have any quarterly reports further back than Q3 '97 to determine if this is truly a cyclical issue. However, even if there is some cyclical nature in the cash flows, in aggregate for 1997, there was a net cash outflow of $9.5M, and a net outflow of $10.6M associated with working capital items. This is not sustainable!!
It is also curious to me that a company that is running cash deficits continues to pay a dividend, and even increase the level of the dividend. In fact, you could argue that they are borrowing money to pay the dividend, because if they didn't pay the dividend, the amount of short-term borrowing they would have to do would be decreased by that amount.
I'm not trying to rain on the GDL parade, but one of my first rules of DD is "Question everything", and right now I have more questions than answers.
Gord |
