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Liquor Stores N.A. Ltd. (symbol LIQ on Toronto; www.liquorstoresna.ca) is North America’s largest private liquor store operator, with 244 outlets. Of that total, 173 are in Alberta, 35 are in B.C., 23 are in Alaska and 13 are in Kentucky.

Liquor Stores’ banners include Liquor Depot, Liquor Barn and Brown Jug.

Alberta privatized retail liquor sales in 1993. Liquor Stores Income Fund first sold units to the public at $10 each and began trading on Toronto in September 2004.

Liquor Stores Income Fund converted to a corporation on December 31, 2010, in response to Ottawa’s income trust tax.

The company’s strategy is to offer more choice, typically two to three times more products than its competitors. Liquor Stores lets each location juggle its product mix to meet local tastes.

Stock advice: Few prospects for growth by acquisition

In the three months ended December 31, 2014, the company earned $6.7 million, down 13.8% from $7.8 million a year earlier. The decline was largely due to higher rent and remodelling costs, as well as new investments in training, marketing and computers.

On December 19, 2014, Liquor Stores raised $57.5 million by selling 3.9 million shares at $14.65 each. It used the funds to pay down its long-term debt of $157.7 million (as of September 30, 2014). As a result, its long-term debt now stands at $92.0 million, or a reasonable 23% of its market cap.

The extra shares cut the company’s per-share earnings by 17.6% in the latest quarter, to $0.28 from $0.34. Cash flow per share declined 13.0%, to $0.47 from $0.54.

Sales rose 6.9%, to $196.7 million from $184.1 million. Same-store sales gained 3.5% in Canada, partly because the company launched a new customer-loyalty plan. U.S. same-store sales rose 3.6%.

The company pays a monthly dividend of $0.09 a share, which yields a high 7.2% on an annualized basis.

Liquor Stores benefits from steady demand, but its earnings will likely suffer somewhat, as low oil prices have slowed Western Canada’s economic growth. Its Canadian growth potential is also limited by the fact that only Alberta and B.C. allow private liquor sales. It can grow by acquisition, but there are few other large liquor sellers for it to buy. Its competitors are mainly smaller, privately held stores.

The company entered the U.S. in 2008, when it bought 19 Brown Jug outlets in Alaska. It followed that with its purchase of eight Liquor Barn stores in Kentucky in 2009. However, the long-term prospects for its U.S. expansion are uncertain. Many successful Canadian retailers have gone on to costly failures in the U.S.

The stock trades at 18.8 times the $0.80 a share the company will likely earn this year.

TSI Network recommendation: Sell.