North West Company (TSX: NWC, OTC: NWTUF) announced pleasing headline results for the third quarter, mainly due to the reversal of previously charged stock-based compensation. Earnings per share jumped 33% year over year, while the dividend was unchanged.

Overall sales grew 1.3%, with Canadian operations faring better than international operations. Same-store sales excluding foreign-exchange impact increased by 1.5%. Costs were well controlled, resulting in a 19% rise in EBITDA (earnings before interest, taxation, depreciation and amortization). Excluding the positive impact of the reversal of stock-based and incentive compensation, profits would have been unchanged.

The international division struggled somewhat, with a slight decrease in gross profits as sales declined by 1.3%. Key reasons were the 50% cut in the Permanent Fund Dividend in Alaska, which hampered sales at AC Value Centers, and the Zika virus, which had the same effect at Cost-U-Less stores in the Caribbean.

The Canadian operations grew sales 3.3% and increased gross profits by 3.8% thanks to new Giant Tiger store openings and successes with the Top Categories and Top Markets initiatives. Economic conditions in Northern Canada are expected to improve in 2017 as a result of the increased government-sponsored childcare benefit and infrastructure spending.

Although debt levels have risen moderately, North West’s balance sheet remains sound, with a debt-to-capital ratio of 38% and healthy operating and free cash flow. The company is in the process of ramping up spending to accelerate its store-improvement program, which will place some strain on the balance sheet. However, we believe the dividend is safe and expect mid-single-digit growth once the capital program completes.

North West is also in the process of acquiring Riteway Food Markets in the British Virgin Islands. Final due diligence has been completed and the deal is awaiting government approval. The acquisition price for Riteway has not been disclosed, but it should be very manageable given the relatively small scale of operations.

The company’s valuation is in line with its Canadian peers, though a premium could be justified given its competitive positioning in niche markets and higher levels of profitability. We would like to see the dividend start to grow again, but it will probably be another 12 months before that happens. Meanwhile, North West’s stock yields an attractive 4.5%, and we estimate its fair value at C$31, or US$23.