North West Company Inc.: Sustainable Dividends Amid Operational Gains?

The North West Company Inc. (NWCo) has delivered a solid first quarter 2025, with sales growth, margin improvements, and a sustained dividend of $0.40 per share. This performance raises a critical question for income-focused investors: Can this dividend remain secure and grow, or is NWCo's recent success a fleeting blip? A deeper dive into its financials and strategy reveals a story of resilience and cautious optimism.

Sales Growth: Steady, but Not Spectacular

NWCo's consolidated sales rose 3.9% to $641.4 million in Q1 2025, driven by same-store sales growth of 3.5% and contributions from new stores. However, this growth was tempered by weaker wholesale sales and an extra day of sales in the prior year. Excluding foreign exchange impacts, sales grew just 1.8%, underscoring the reliance on geographic expansion and FX tailwinds. .

While same-store sales in Canada rose 4.0%, International Operations lagged at 2.8%, suggesting regional disparities. Investors should monitor whether NWCo can sustain momentum in its international markets, which account for a growing portion of its $2.6 billion annual sales base.

Margin Expansion: A Key Positive

The real star of NWCo's Q1 was its margin performance. Gross profit surged 7.2% to $214.0 million, with a 103 basis point improvement in the gross profit rate. This was driven by better inventory management, reduced markdowns, and a favorable sales mix. Even after accounting for higher SG&A expenses (up 8.7% due to investments in staff, IT, and one-time Next 100 costs), EBITDA rose 3.2% to $70.1 million. Adjusted EBITDA, which excludes non-recurring items, soared 10.1% to $78.0 million—a clear sign of operational efficiency gains.

Dividend Sustainability: The Numbers Tell a Story

NWCo's dividend of $0.40 per share has been consistent since at least 2024, with no changes despite economic headwinds. To assess its safety, investors must evaluate payout ratios and cash flow.

• Net Earnings: While reported net earnings rose only 2.2% to $27.7 million, adjusted net earnings (excluding Next 100 costs and share-based compensation) jumped 14.2% to $33.6 million. This suggests the dividend is comfortably covered by adjusted earnings.
• Payout Ratio: At face value, the $0.40 dividend (annualized $1.60) implies a payout ratio of ~75% using diluted EPS of $0.53. However, using adjusted net earnings, the ratio drops to ~50%, a far healthier metric.

NWCo's free cash flow (not explicitly disclosed but implied by EBITDA and capex trends) should also support dividend sustainability, provided it maintains current margins.

Strategic Momentum: Next 100 and Risks

NWCo's Next 100 initiative—aimed at operational excellence, inventory management, and store-level execution—appears to be paying off. Improved “on-shelf availability” and merchandise assortment are critical in a competitive retail landscape. However, challenges remain:

• Wildfires and Supply Chain: Wildfires in northern Canada disrupted operations, while the Global Minimum Tax Act (GMTA) increased tax rates, compressing net profits.
• Cost Investments: One-time costs tied to Next 100 and IT upgrades may continue, though these are expected to fade as the strategy matures.

Investment Thesis: A Conservative Income Play

NWCo's dividend appears sustainable, but its growth potential hinges on execution. Key considerations:

1. Valuation: At current stock prices, NWCo's dividend yield and P/E ratio (using adjusted earnings) must be compared to peers. A yield above 5% (assuming a stock price below $32) could make it attractive.
2. Margin Resilience: Can NWCo sustain margin improvements amid rising input costs and GMTA headwinds?
3. Growth Catalysts: Expanding store count and international penetration could drive top-line growth, but execution risks exist.

Conclusion: A Hold with Upside Potential

NWCo's Q1 results suggest the dividend is safe, backed by margin gains and disciplined cost management. However, the stock's upside is tied to clearer signs of top-line acceleration and sustained margin expansion. For income investors, it's a conservative hold with potential for modest growth—if NWCo can convert operational improvements into consistent earnings momentum.

Final Note: Monitor NWCo's Q2 results for further signals on wildfire recovery and the GMTA's tax impact. A dividend hike in 2026 could emerge if adjusted earnings continue their upward trajectory.