Category Archives: Masters2017_1


Source: Sears Canada Inc. (CNW Group/Sears Canada Inc.)

Sears Canada Inc. (TSX:SCC) posted a 125.6% net loss in Q3 2016 as compared with the same quarter in 2015, according to their latest financial statement located in their Third Quarter Report.

In an email exchange, however, Jim Danahy, CEO of CustomerLab, says this net loss “this is not a one quarter blip”, and this recent decline has been a long time coming.

But, there are many notes at the beginning of the Management Discussion and Analysis document that account for this loss within the last two years in the same quarter. Vincent Power, Vice-President of Corporate Affairs and Communications at Sears Canada emphasizes that these notes are “in themselves cautionary notes, highlighted as potential risk factors that are put in every statement”.

A few factors among these cautionary notes indicate that Sears Canada failed to innovate in the face of change.

In November 2015, Sears Canada lost their ten-year agreement with JPMorgan & Chase and as a result offered many promotions for customers before the contract ended. Since Sears Canada’s finance company changed to Easyfinancial and its parent company GoEasy, the promotions that Sears Canada offered in the third quarter of 2015 were not available in 2016’s Q3, accounting for a greater net loss when both Q3s are compared with each other, said Power. As such, in 2016’s Q3 there were was less incentive to purchase big ticket items such as appliances, and charge it to the Sears Card to avail of promotions.

Tied into the loss of the Sears credit card backed by JPMorgan and Chase was changes to the Sears Club program, another factor to account for the net loss in 2016’s Q3 as compared with the same quarter in 2015. Under the previous card, enrolment in the Sears Club loyalty program was automatic when a customer applied for the card, and when they used the card at Sears or at other retailers. Under the new financing program, Sears Club became a stand alone program that a consumer had to enroll, independently, thus resulting in the inability to attract and retain customers in the loyalty program.

Ken Wong
Source: Queen’s University

Ken Wong, Associate Professor & Distinguished Professor of Marketing at the Smith School of Business at Queen’s University unpacks the lack of innovation with regards to the Sears Club program. With a loyalty program a company can “track future purchases based on past purchases” and if fewer customers are active and loyal to the program, this doesn’t give Sears Canada any “market research or individual customer data on how to move forward”.

Their Third Quarter Report also mentions their their delay in moving their catalogue customers online, and also the delay in developing and implementing their e-commerce platforms. With their catalogue legacy, in place since 1953, Sears Canada had the infrastructure set up to move seamlessly to e-commerce, as they already had the environment where consumers didn’t have enter the brick and mortar store to buy their goods – they could buy from home, have the product shipped directly to their home or even pick up in store.

Wong articulates that “catalogue business is the kissing cousin of e-commerce. Sears was positioned for greatness in the world of e-commerce and online shopping. All they had to do was automate, and they didn’t”.

Power also mentions their loyalty to their catalogue customers, but highlights these clients tend to fit an ‘older demographic of empty nesters’, who may not need to by big ticket items like appliances with the same frequency as young families who are in the process of building a home, and shopping online.

Sears Canada’s Third Quarter Report for 2017 will be released on October 21st, 2017.

Sears Canada Inc. Stock Prices by Saalem on


From Trudeau to Trudeau: The evolution of LGBT Rights in Canada


By Amber-Dawn Davison

Every summer, rainbow flags fly in cities across the country marking the nationwide Canada Pride celebration. People from every culture, gender, and sexual orientation gather to celebrate the LGBT community as an integral part of Canadian society. But beneath the swirls of colour and vibrant pageantry lies a deeper reason for festivity: just 50 years ago, homosexuality was illegal in Canada.

Until 1967, no government had yet questioned that homosexuality was a sin. A young Pierre Trudeau, Justice Minister at the time, took the oft-quoted stance that “the state has no business in the bedrooms of the nation.” He proposed amending the Criminal Code of Canada to decriminalise homosexual acts between consenting adults in private, “separating the idea of sin and the idea of crime.”

Justice Minister Pierre Trudeau defends his proposal, 1967. [Source: Creative Commons]
In 1969, newly elected Prime Minister Trudeau saw his proposal enacted into law. That one amendment triggered a series of political, legal and social changes that led to Canada in 2005 becoming the fourth county in the world to change the legal definition of marriage, extending the right to gay couples.

Peter Maloney, a Lawyer and former politician with Pierre Trudeau’s Liberal party, was one of the first Canadian political figures to publicly come out as gay. He remembered that before 1967, to be labelled as gay was akin to being called a dangerous sex offender, and often destroyed professional reputations and personal lives.

Before that point, if I had even asked a same-sex person to engage in sexual behaviour, that was a criminal offence,” he recalls. You had to be pretty bold if you wanted to engage in sexual behaviour, and you had to be pretty sure of who you were talking to or you could wind up in jail.”

The decriminalisation of homosexuality was critical to LGBT Canadians becoming socially accepted and treated as equal under the law. Judy Girard, who teaches human rights practice in civil society at Carleton University says that other pieces of legislation like the 1982 Charter of Rights and Freedoms were more powerful, but the 1969 amendment was symbolically fundamental and led to other discriminatory legislation across the country being struck down.

“Once we were ‘legal’, so to speak, it became clear that we deserved rights and freedoms which were available to all other Canadians,” says Girard. “With one stroke of a pen, Pierre Trudeau caused every jurisdiction in Canada to comply. Those of us who were pressing for changes one piece of legislation at a time saw a watershed of progress.”

LGBT rights grew over the next twenty years, ending one by one many discriminatory practices in both Canadian law and society. By the late 90s, heterosexual biases were erased from most legislative documents, replaced by legal protections against discrimination based on sexual orientation. Then, in 2005 same sex marriage was legalized.

Fifty years after Pierre Trudeau’s 1967 proposal,  both Girard and Maloney agree that some inequities still persist. For instance, the difference in the age of consent for anal sex for heterosexual couples versus homosexual couples, and the “blood ban” that prevents gay men from donating blood unless they have abstained from sexual intercourse for a year prior. However, Trudeau Jr. seems intent on fixing those problems.

Justin Trudeau celebrating Canada Pride [source: Creative Commons]
We have made great strides in securing legal rights for the LGBTQ2 community in Canada,” he said in a November 2016 press release. “But the fight to end discrimination is not over and a lot of hard work still needs to be done.” The same release announced the appointment of openly gay MP Randy Boissonnault as a Special Advisor on LGBTQ2 issues to work on those inequities, and help shape a government apology to the gay community for past injustices.

In contrast to the civil rights issues unfolding across Canada’s southern border, Trudeau’s open and equitable treatment of LGBT rights is comforting to LGBT people all over the world. In his own words, “Canadians know our country is made stronger because of our diversity, not in spite of it.”

Nalcor uses uncommon reporting methods for its comeback statement


Nalcor’s comeback financial statement uses uncommon and potentially questionable reporting methods, according to Ottawa accountant John Wright

A provincial energy corporation in Newfoundland and Labrador appears to be making a comeback after losing $19 million and their entire board of directors in the spring of 2015.

The board of directors was replenished quickly and the company pursued their controversial undertakings at Muskrat Falls despite protests. Although Muskrat Falls is still a work in progress, Nalcor’s financial statement indicates much of their profit has come from investments in new projects, along with lower operating costs and higher oil production.

The third quarter financial statement indicates that during the first three months of 2016 the company made $38.7 million more than they did during the same period in 2015. This quick turn-around was accounted for in both financial charts and subsequent explanatory paragraphs in the report.

According to the report, one of the primary factors contributing to the company’s financial resurrection is a reduction in operating costs. The outline in the statement says the increase to $80.9 million in operating cost revenue over the first nine months of 2016 compared to $20.3 million for the same period in 2015 is due to “lower salary and benefits expenses, professional fees and system equipment maintenance.”

These figures are represented with a superscript number one next to them, indicating more information in a footnote. The note says the numbers are recorded using uncommon accounting techniques, known as non-generally accepted accounting principles.

These methods are cause for raised eyebrows according to John Wright, senior accountant at Vaive and Associates Firm in Ottawa. Wright says these methods of financial reporting are uncommon for a reason. “If someone came to me with a non-GAAP statement, we would have to look at it very closely to find out why they used them and what it means before we made any conclusions,” Wright says.

Although they can be used for tax evasion purposes, says Wright, it generally creates more work for the company in the long run since they have to produce two financial reports. This makes it an uncommon and undesirable practice.

Nalcor officials decline to comment on the matter.

Overall, Wright cautions “don’t trust them.”

The other factors contributing to the company’s increased revenue are all recorded using common practice. Oil production for Nalcor’s third quarter brought in almost $1.5 trillion compared to the previous year’s $299 billion. This increase is due primarily to the company’s ability to purchase oil at a lower price per barrel during 2016, coupled with increased production during the year. These two aspects allowed the company to produce more for less, and to soak in the financial benefits of such.

The statement also says the company recovered lost revenue through higher customer rates for services. They outline this practice as an ‘entitlement’ in the statement.

Finally, the increase in revenue for 2016 is also attributed to the company’s decision to increase investments in hydro projects. Nalcor has a number of sister companies across the east coast of Canada including Emera which recently announced the initiation of the Atlantic Link Transmission Project – a 350-mile submarine that will deliver energy to New England. New projects such as this provide the company initial income through deal-making and the promise of additional income with the completion of the project.

In a November 2016 press release, Nalcor’s CEO Stan Marshall said “Nalcor’s financial position is very sound… We are focused on getting back on track and completing as much work as possible before the onset of winter.”

Emera Stock Chart by chantalbacchus on

Potash Corp. of Saskatchewan loses 934 million of its revenue in 2016


The Potash industry is not faring very well these days. The biggest Potash mining company in the world lost 934 billion of its revenue in the past 12 months. Considering that Potash Corp. made roughly 1,27 billion in December 2015 as opposed to 336 million in the same month of 2016.

Potash Corporation Stock Prices– Past 5 Years by flor.bonneville on

This substantial loss of revenue sounds alarming. More than 400 people lost their jobs at Potash Corp in 2016. Many are worried about the potash industry in Canada.

However, the trend seems to be constant throughout the whole potash mining industry.

When companies experience losses of capital, the first question to ask is whether the reason for the loss comes from inside the company. That is to say: “Was there a strike?” or “Did the company lose a major client?” If the answer to one or the two of these questions is yes, then there is an internal reason for the loss of money.

Professor Shantanu Dutta teaches finance at the University of Ottawa. He says that in the case of Potash Corp, an internal reason for the plummeting of net income does not apply. “This is probably not internal”, he says.

Effectively, the company did not experience a strike in the past year, and it has not lost that many sales. Potash Corp lost 33 per cent of its sales in China from 2015 to 2016, but not because it lost a client, but because the demand was lesser.
The sales have not fluctuated much in the past three years. In fact, Potash Corp’s sales increased from 2015 to 2016.

The internal changes are not significant enough to create a 75% crash in the company’s revenue over twelve months. The sales have not fluctuated much in the past three years. In fact, Potash Corp’s domestic sales increased from 2015 to 2016 of 21%.

We thus have to turn to the external factors affecting the company.

The external factors one needs to consider when analyzing a company’s money loss are competitors increasing their own shares of the market and the cyclical turn of the market.

Journalist Ian McGugan of the Globe and Mail has written many stories about the potash industry. He says that the huge loss experienced by Potash Corp is “all about the plunging price of potash”. Indeed, the price of potash has crashed of half its value on the stock market within the past five years.

McGugan says that the plunge of the price of potash “reflects growing supply”. Which means that the top five markets bought more potash for the same price as in previous years, therefore decreasing their demand for the subsequent years.

All in all, things are not looking good for the potash industry in the coming years. BMO analyst Joel Jackson writes that “few expect better” in the potash industry. Jackson writes that the question is whether the market will crash even more in the coming years.

However finance expert Shantunu Dutta says that there are always fluctuations in the natural resources market, because sales can only go so far when the market is driven by nature. It’s a cause and effect chain– if crops aren’t good for the top five market, then the demands will not be so high. Or alternatively, if crops are doing good and clients buy a lot of potash, then those clients will have surplus for a long time.

“It’s a typical situation for the natural commodity industry”, Dutta says. Hopefully, we can expect the return of a healthy potash market in the coming ten years.

(To see the annotations that accompany this financial statement, please click on the “Notes” tab.)

Second Cup losses shrinking, but still far from first place


Second Cup is working its way out of a six-year financial deficit under the leadership of President and CEO Alix Box, but the Canadian coffee shop chain still has a long way to go—and a lot of structural changes to make—if it hopes to compete with coffee giants like Starbucks and Tim Hortons.

Box was named CEO of Second Cup in February of 2014 to help revitalize the Second Cup brand, and steer the company back in a profitable direction. Formerly Vice President of Operations, Company, and Licensed Stores with Starbucks Canada, she has a wealth of experience in “achiev[ing] strong growth in sales and profitability” in the coffee shop business according to a 2014 press release. Almost three years later, it appears she has lived up to her reputation: Box’s strategic business plan has reduced the operating loss of the company from over $30 million in September of 2014 to just $25,000 in September 2016.

This upward trend is due in part to Box’s aggressive-but-effective franchising strategy. In a May 2016 press release, Box said that the company is “moving toward an asset-light model,” which means that it intends to close most, if not all, of the company-owned stores in order to focus on supporting the much-more-profitable franchises. Since the beginning of 2014, Box has closed 41 under-performing stores, 18 of which were company-owned. As of September 2016, only 5 per cent of Second Cup’s 298 shops were company-owned. Second Cup says that the closures, along with a 2014 internal restructuring that cut almost a third of the staff at headquarters, should save the company up to $2.3 million annually. Box says this money will be rolled into franchise relations.

Financial analyst Alex Mirhady says Second Cup has “stemmed the bleeding” by closing the money-losing shops, and that a franchise-based model is the company’s best bet at this point. “They know that franchise owners are all independent business owners who are going to work really hard. Their own profit is on the line, versus corporate-owned stores where you have a manager who works for $10 an hour and then goes home. They have a vested interest.”

The reality of this is reflected in Second Cup’s operating margin. From the fall of 2015 to the fall of 2016, the corporate-owned stores cost the company over $700,000. By contrast, the franchise stores showed a net profit of almost $1.2 million. Mirhady says that the move toward franchising is the obvious choice, but that he believes significant financial gains from the decision will take some time to materialize.

“They’ve had to invest a whole lot into renovating their stores, and they have had to pay a lot to close those stores, with severance pay, getting out of leases, and likely selling some property at a deficit,” he says.

But while the company has yet to post any substantial profit, it is getting close to breaking free of its operating loss. Box states in an October 2016 press release that she is “pleased with the significant earnings progress,” and “optimistic that this will continue into the fourth quarter.” The financial statements for the fourth quarter—or winter season—of 2016 have yet to be posted.

But Mirhady believes there is still one major hurdle that second cup will need to face, whether its profit increases or not: that is, the lack of public faith in the company, and resulting plummeting stock prices. “The stock price reflects the expectations of the market for [the business’] future profits. In terms of what the stock market thinks of them… have they really turned the corner yet? I don’t see it.”

Only time will tell if Second Cup can recapture its mantle as one of Canada’s top coffee chains. But for now, it might have to settle for being Fifth or Sixth Cup.

Second Cup Stocks 2014-Present by amberdavison on

WestJet net earnings drop amidst expansion plans


One of Canada’s top airlines, WestJet’s, net earnings have fallen by 20 per cent over the last three quarters, compared to the same period last year. According to an analysis of its third quarter report released in September.

The company based out of Calgary services flights from over 100 locations within Canada, the United States, and overseas. Meaning that it is in direct competition with a number of domestic, as well as international airlines.

WestJet’s slide in earnings follows what the report called its most “profitable third quarter in the airlines history.” The airline reported an increase of nearly 14 per-cent in net earnings in its last quarter compared to last year, in its most recent quarterly report. Yet, it recorded a decrease of close to 64 million dollars during the first three quarters of the 2016 fiscal year.

Net earnings have dropped 21% over the last three quarters compared to the same period last year.

WestJet said in its most recent quarterly report that the decrease in earnings is largely due to the “devaluation of the Canadian dollar,” as the airline frequently often operates in American dollars due to the company’s international services.

WestJet also recently announced the expansion of their airplane fleet, which the company also attributes for the drop in earnings.

Its September report outlines an extensive plan to acquire an additional 166 planes in the next 10 years. Five of which the report said would be added in the final quarter of this year.

Lauren Stewart, WestJet’s Media Relations Advisor, said the company has reintroduced a year long Halifax to Gander, NL, flight beginning this summer and an international service between Calgary and Nashville. She added that depending on the success of these additional flights, the airline has a number of other services in the works.

Stewart declined to comment when asked about how the recent expansions have impacted the company’s decline in earnings over the past three quarters.

Cyril Mullaley, owner of the accounting firm Cyril P. Mullaley, C.A., C.P.A. from Newfoundland, says that the airline’s drop in earnings is largely due to the additional expenses created by WestJet’s most recent expansions.

Although the airline’s operation expenses increased by a marginal 7 per cent in the last quarter, and 5 per cent in the last three, its investing activities grew substantially.

WestJet Airline’s stock prices by jordansteinhauer on

The September report recorded a nearly 40 per cent increase in investment activities in the last three quarters of this year, compared to the same period in 2015. This includes the recent acquisition of new aircrafts, as well as other assets like property and equipment.

Mullaley added that not only does expanding flights into new markets, and increasing the company’s fleet mean higher expenses and more investments, but also more competition.

By expanding their market into new areas like Nashville, WestJet is in direct competition with a number of airlines that have been operating out of the city for years. Though the company is increasing its visibility and the surface area it covers on a map that does not mean its profits will immediately increase along with it.

Mullaley said that even with the significant drop in earnings “it is not a reason to stop the expansion,” or to go into “protectionist mode” as the company continues to be what he deems as profitable.

He added that he believes that WestJet is in definite need of an expansion if the airline intends to keep up with the ever-increasing competition that it faces in the Canadian and Global markets.

Mullaley said he could not comment on whether or not he would invest in the airline with the earnings as they currently stand, but he acknowledges that WestJet is positioning itself for growth in the upcoming years.

Growing pains for lululemon


Despite a surge in stock prices and unexpectedly high revenue for lululemon athletica inc., the company had a disproportionate increase in expenses this past quarter.

Lululemon’s administrative expenses increased more than its revenue, according to the financial statement from the third quarter. The statement, released on Dec. 7, 2016, shows an increase in revenue by 13 per cent, but administrative expenses increased by 18 per cent.

Expenses growing faster than revenue can be a potential red flag for investors.

While a difference of five per cent does not sound like much, it means that it is costing lululemon more to do business than what the company is bringing in.

As seen in the financial statement, 34 per cent of its revenue went into administrative expenses, which include staff wages for the stores and head office, running the head office, and marketing the brand.

Lululemon opened 35 new stores this quarter, mostly in the United States. These new stores require new staff, and that staff requires wages, benefits and bonuses. Along with the staff for the stores themselves, lululemon needed to expand its head offices in order to ensure these new stores had proper management.

Both of these expenses comprise about half of the administrative expenses in the financial statement.

Michael McIntyre teaches financial accounting at Carleton University. Photo from the Sprott School of Business.

According to Carleton University business professor Michael McIntyre, these are an expected expenditure when a company opens new stores. The staff both in the stores and in the head offices must increase if the stores are increasing in numbers.

McIntyre said that it is not uncommon for newly opened stores to drain a company’s revenue in the inaugural stages. The expenses to operate these new stores are equal to mature, longer-established stores, McIntyre said, but the sales are not typically as strong as those established stores.

Lululemon is putting its unique flare into these new stores. The company prides itself on what it calls community feel, as seen in the company’s mission statement. CEO Laurent Potdevin said in a press release that the company strives for an “unparalleled guest experience.”

As these new stores have been rolling out around the world, they have included smoothie booths, art installations and lounge areas. Lululemon is turning away from the showroom style clothing store and pressing for a place where customers can hang out and relax.

This community feel that the company puts into its stores translates into a fairly unique expense in lululemon’s financial statement called community costs.

As can be seen in the financial statement, community costs are lumped together with other professional expenses. As McIntyre said, this innovation has a cost, in execution but particularly in planning. They would have needed to bring in marketing experts to build this community experience, he said.

The company denied to comment on how much of the $8 million was put into community costs, and denied to comment on how that $8 million was divided up overall.

McIntyre is not overly concerned about this increase in administrative costs. He says that the company is big enough to experiment with things like smoothie booths and art installations in the stores.

“It may work, it may not,” he said. Either way, he said, they will probably be fine.

Investors similarly do not seem concerned about this increase in expenses. Lululemon stocks were down during the fall when the retail market in the U.S. went through a slump.

On Dec. 7, 2016, however, the financial statement was released and it reported better results than even the company had predicted. Lululemon’s stocks jumped from 59.50 to 70.25 the next day and have remained around the same price since.

Fall slump by rachellevymclaughlin on

“Our entire team is excited about the momentum in the business,” said Potdevin in a press release. “We look forward to 2017 and advancing our long-term goals.”

In other words, the company is not planning on discontinuing its growth any time soon. It is so far working in its favour.

McIntyre warns, however, that it is important to keep an eye on expense increases, especially when they are disproportionate to the revenue increases. They can spell bad news for the company and investors.

Featured image from Mike Mozart, flickr Creative Commons.

Suncor bounces back from the oil crash and wildfires


Alberta oil giant Suncor is making a healthy recovery from the crash in oil prices in 2015 and the Fort McMurray wildfires in the spring of 2016. Suncor’s most recent quarterly financial statement revealed an over 200% increase in net profits compared to the previous year. The company suffered a $376 million loss in the third quarter of 2015 while in 2016 the company turned around with a $392 million profit.

Suncor’s Stock Prices by marinawang on

A dramatic drop in oil prices in 2015 hit Suncor hard with a net annual loss of nearly two billion dollars, as revealed by its 2015 annual financial statement. In years prior to the crash the company was earning profits in the multi-billions. To add fuel to flame, wildfires in the spring of 2016 caused the company to temporarily suspend oil sands operations, further exacerbating the company’s losses. However, Suncor returned to operations a few months after the fire, and profits were turned around for the third quarter.

“Despite what happened last year their balance sheet still looked very healthy,” said Emily Gray, chartered professional accountant and Sprott Business School instructor at Carleton University. Gray described the company’s finances as “impressive” and said that the balance sheet revealed strong operational cash flows or earnings from regular activities–a sign that the company is in good shape.

The company’s financial strength was demonstrated as Suncor invested a healthy sum in exploration and production–a potentially risky area of investment for an oil company, according to Gray. Gray said that investments in risky developments can indicate a company’s confidence. “Our performance demonstrates the strength of our core assets and our ability to deliver strong cash flow, even in a lower price environment,” stated Suncor CEO Steve Williams in the Q3 financial statement.

Suncor’s financial statement attributed its profits to operating earnings. The operating cost dropped by 18% from last year down to $22.50 per barrel. According to Williams, “Operational excellence is a top priority and has been consistently demonstrated in continuous improvements to reliability and ongoing reductions in both capital and operating costs.” According to the Q3 financial statement, operating costs are likely to continue decreasing.

A deferred tax recovery from the U.K. also contributed to this quarter’s earnings. However, these multi-million dollar earnings were largely cancelled out by losses in foreign currency exchanges.

The 2015 drop in oil prices may not have been as detrimental for Suncor as other companies in the same industry. Suncor was able to acquire Canadian Oil Sands for $4.2 billion in early 2016 and later increased its stake in Syncrude. Both of these investments are now beginning to pay off. Canadian Oil Sands is now Suncor’s largest contributor in production, earning the company a significant portion of the total profits this financial term.

Suncor spent $937 million on increasing its stake to a majority 54% in Syncrude, just months after acquiring Canadian Oil Sands. For this financial term, Syncrude’s oil production increased fivefold while operating costs were cut by a third.

“Discipline and prudence are the hallmarks of our financial strategy” said Williams during a speech regarding the Q3 financial statement, “it also allows us to continue to return cash to shareholders through a competitive dividend”.

Suncor representatives were contacted but did not give original comment.

Where to grow from here: Cineplex reports record media revenues and looks to expand


Cineplex Inc – Stock Prices on Trading View by mmcewan on

Source: Trading View

Logo courtesy of Cineplex Inc.

In its most recent financial statement released Sept.30, entertainment conglomerate Cineplex Inc. reports a record quarter with $44.8 million in media revenue and $376 million in total revenue.

The company anticipates that 2016 will make its best fiscal year to date, projecting over one billion dollars in total revenue.

As Cineplex expands, the question of growth remains. How will the company maintain its revenues moving forward?
Cineplex Inc. is one of the biggest entertainment companies in Canada. With 164 theatres across the country and approximately 77 million customers annually, the motion picture company is dominant in the market.

Through a series of mergers and acquisitions, Cineplex established its prominence over the last decade. Former Canadian entertainment enterprises such as Famous Players, Cinemark, Empire Theatres, and others were subsumed into Cineplex. As of Sept.30, the company reports control over 77.5 per cent of the industry’s market share.

However, in the era of Netflix and online entertainment streaming, the nature of the market has changed. Competition has driven Cineplex to diversify in the shifting media environment.

Exhibition forms the largest source of revenue for the company. Typically, box office sales provide half of the annual revenue. But further and further, the company is expanding its revenues beyond box office and concession sales.

Media revenue has diversified the company’s financial base. In a document accompanying the latest financial report, Cineplex Investors suggests this is achieved through its “wholly-owned advertising business covering everything from onscreen advertising to magazines, online advertising, naming rights and our digital media business, Cineplex Digital Media.”

Simply, media revenue is generated by offering ad space to clients and companies on the wide variety of Cineplex’s platforms. Please click here to review potential ad space.

The effects of diversification have been quick. As indicated, Cineplex’s media revenue was $44.8 million in the latest term, a 30.7 per cent increase from the same period last year.

(To review and compare the recent 2016 financial statement in DocumentCloud, please click on the annotated image below).

As noted above, media revenue is generated from two distinct areas within Cineplex: Cineplex Media and Cineplex Digital Media. In the Q-3's accompanying factsheet, media is defined as "Cineplex’s wholly-owned advertising business covering everything from onscreen advertising to magazines, online advertising, naming rights and our digital media business, Cineplex Digital Media."

Source: Cineplex Q3 2016 Report

Over the last six years, media revenues have steadily increased in the third quarter. In 2011, Cineplex reported a 5.6 per cent decrease in media revenue due to reduced spending in automotive manufacturing. Since then, media revenue has increased gradually from $22.1 million to $44.8 million – a 102.0 per cent increase.

(To review and compare the 2011 financial statement in DocumentCloud, please click on the annotated image below).

The third quarter in 2011 saw a decrease in the media revenue. As noted above, the revenue was impacted by both domestic and international economic conditions and events. This is noteworthy as media revenue does not have its own, specified risk assessment in the 2011 MD&A. In later reports and management discussions, the economic concern here is noted. For example, the "media risk" identified in the Cineplex 2014-2016 third quarter reports identifies the following: "Media revenue has been shown to be particularly sensitive to economic conditions and any changes in the economy may either adversely influence this revenue stream in times of a downturn or positively influence this revenue stream should economic conditions improve."

Source: Cineplex Q3 2016 Report

Michael McIntyre, an Associate Professor of Finance at Carleton University, notes the increase and confirms the trend. He says that advertising in the theatre is a newer, immature model which dates back only five or ten years. The expansion of the “leisure dollar” beyond box office sales warrants further analysis, he suggests.

As media revenues increased, the recent financial statements include a Media Risk analysis in the Management’s Discussion and Analysis (MD&A). In the assessment, media revenue is stated as being “particularly sensitive to economic conditions” and that any economic changes could impact this revenue source – as noted in the Cineplex Q3 2016 Report.

Additionally, the MD&A states that Cineplex may not be able to replace the revenues created by major media customers if they were lost.

In reviewing the risks, McIntyre says that the company may be viewing the media revenue as a discretionary expense in the MD&A, whereas the revenue and risk could be more substantial:

Michael McIntyre is an Associate Professor of Finance at Carleton University. Photo courtesy of the Sprott School of Business.

“It is discretionary in the sense that you can just turn it [advertising] off like a tap. Whether they really can from a business exigency point of view, is debatable.” McIntyre says.

“In a downturn, you’re fighting harder for your customers. So to me it’s quite debatable whether that really is as discretionary as they are eluding to.”

Cineplex is looking to expand further in the North American market, as confirmed by CEO Ellis Jacob in fall press releases.

With its large market share in Canada, McIntyre says that Cineplex may have run out of room to grow domestically. He says it could impact share price and capital in turn if growth “flat lines” and shareholders decide to invest elsewhere. The ways to counter are diversification or expansion, options Cineplex continues to explore.

Cineplex’s media strengths are identified as a strategic corporate priority. Moving forward, the media revenues should be expected only to grow.

The 2016 Cineplex annual report will be released on February 15th, 2017.

Cineplex-Investors did not respond to requests for comment by the deadline.

Photo courtesy of Cineplex Inc.

Shopify hoping for sustainable revenue, despite rising operating expenses

Shopify banner image taken from Creative Commons/Flickr.

Rising operating expenses represent Shopify’s commitment to expansion, but in the tech industry only time will tell whether 2016’s acquisitions will correspond to a sustained increase in revenue, experts say.

Shopify’s revenues increased by 91.7 per cent over the last three quarters of their 2016 fiscal year compared to the same period the previous year, according to an analysis of its third quarter results.

But Shopify’s increase in revenue was matched by a 91 per cent increase in total operating expenses. Packaged within that increase is their acquisition of Kit CRM and Boltmade, as well as new Shopify facilities being opened in Toronto and Waterloo.

Together, an 88.5 per cent increase in sales and marketing, a 90.5 per cent increase in research and development and a 101.2 per cent increase in administrative expenses resulted in a subsequent 147.9 per cent rise in loss from operations over three quarters ending on Sept. 30, 2016.

A near-doubling of all operating expenses is characteristic of a tech corporation hoping to develop an advantage over its competitors, says Dr. Ian Lee, who specializes in strategic management and international business at the Sprott School of Business at Carleton University.

“I wouldn’t be worried about net loss in the tech industry as long as revenue is increasing and they are creating value for customers and shareholders,” Lee said.

Shopify’s net loss grew by 112.2 per cent over three quarters in 2016 compared with net loss recorded from the same period in 2015.

However, rising net losses haven’t affected investor confidence in the e-sales platform, who went public on the New York Stock Exchange in 2015. In May 2015 Shopify’s stock was valued at just over $20 a share. As of Feb. 3, it stands at $52.12 a share.

Chart representation of Shopify’s share price since IPO on NYSE. by AndrewSavory on

Lee believes that Shopify’s rising share price lends itself to their ability to create value for customers and to differentiate themselves from new entrants into the e-commerce market.

Shopify has made a growing investment in research and development mainly through acquisitions like Boltmade, a product design firm intended to “accelerate the development of the Shopify Plus product offering,” according to a Shopify press release.

Shopify Plus was launched in 2014 to help the core of small and medium sized businesses deal with a higher volume of sales. The mobile application has grown to service over 1,000 merchants and has helped Shopify separate itself from competition and is part of the 119.7 per cent increase in revenue generated from merchant solutions between three quarters ending in 2016 and 2015.

Value in the tech industry is largely dependent upon innovation, but Dr. Alejandro Ramirez believes that Shopify is well-positioned for future success, despite rising operating costs and the cost of recent acquisitions.

“More businesses are realizing they need to be available online an mobile through apps. Shopify sells you a presence that is accessible and easy to use for customers. They have a large hand in that market,” said Ramirez, who teaches about emergent information technologies and social software at the Sprott School of Business.

“The moment in which total operating expenses exceeds revenue, then you have a problem.”

Shopify’s revenues increased by 88.6 per cent in the third quarter of 2016, which as evidenced by an analysis of the company’s most recent third quarter, is 1.1 per cent higher than the 87.5 increase in total operating expenses for the same period.

Ramirez cautioned that Shopify’s success will depend on whether they can maintain a positive differential between revenues and expenses while awaiting a potential sustained increase in revenue and reduced operating costs resulting from recent acquisitions like Boltmade Kit CRM.

Regarding the short and long term financial impact of recent acquisitions, Samantha Tam, a Shopify media representative, declined to provide comment on operating expenses and said “opinion based or qualitative statements cannot be provided until mid-February.”

Shopify’s annual report will be released on February 15, 2017.