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Canadian Tire Corporation Limited: Buy the Dip?

Canadian Tire Corporation Limited (TSX:CTC.A) has been taking a plunge as investor pessimism continues to grow following an earnings release which was not as bad as the recent stock activity would suggest. The stock is now down over 7% from its high and appears to be creating a terrific long-term buying opportunity for investors looking to pick up shares of an iconic Canadian company with a top-notch management team that knows how to adapt to a fast-changing retail environment.

Why is the stock pulling back?

The recent quarterly revenue and profits beat estimates, but investors still weren’t happy over the rising threat of e-commerce retailers like Amazon.com, Inc. (NASDAQ:AMZN). Canadian Tire has never expressed any interest in entering the home delivery business; there was no need to offer such a service because approximately 90% of the Canadian population lives within 15 minutes of a Canadian Tire location. This all changed following the recent earnings report, and it appears the management team is making big moves to adapt to the rising threat from e-commerce giants.

Stephen Wetmore, the CEO of Canadian Tire, said the company needs to decide how many of its 500 stores will be participating and which products will be eligible for home delivery. Currently, Canadian Tire’s subsidiaries Mark’s and FGL Sports currently offer home delivery services, but does it make sense for Canadian Tire stores to deliver?

Although it appears that e-commerce giants are pressuring Canadian Tire’s sales, I don’t think the fear makes any sense, and I believe Canadian Tire will adapt and rise to the top thanks to its experienced management team, which is always thinking steps ahead.

Canadian Tire sells things that you wouldn’t normally order online. It would cost a great deal to ship four tires to a Canadian home, and why would you opt for such a service when the odds are that a Canadian Tire location is a few minutes away from your home? Most of Canadian Tire’s products are meant to be purchased at physical locations. The “home delivery” experiment is nothing to be afraid of.

Many other retailers have been investing in home delivery initiatives as a response to the rise of e-commerce. Usually, these retailers invest in such initiatives because sales have already been hit hard. This is not the case for Canadian Tire.

The company is testing home delivery, and it’s probably going to be offered primarily for the smaller items it sells in its stores, like pepper shakers, motor oil, or items used to spruce up homes. These are the items that could face pressure from the rise of e-commerce, but the large items Canadian Tire sells probably won’t face pressure unless Amazon suddenly decides to ship tires and lawnmowers under its Prime service — not a likely scenario.

What about subsidiaries like Mark’s or FGL Sports?

Mark’s is a Canadian industrial clothing store that offers great work wear as well as casual wear. It’s a great brand, but it is slightly vulnerable to the rise of e-commerce. It has a decent home delivery service in place.

Let’s consider FGL Sports. Many sporting goods are meant to be sold at brick-and-mortar locations. If you’re a hockey player, you want to feel a stick for flex and see if the blade is the curve that you want. You simply can’t buy a hockey stick online without getting a feel for it. It’s the same thing with skates, golf clubs, and many other sporting goods.

Canadian Tire is head and shoulders above the competition in the Canadian retail scene, and I don’t think digital retailers will threaten Canadian Tire or its subsidiaries. Sure, there’s a bit of pressure on same-store sales, but this is nothing to worry about. Home delivery is a test that could strengthen sales — not a warning sign indicating that the company is experiencing major headwinds from digital retailers.

I would pick up shares now and more on any further dips that may happen over the next few weeks. Canadian Tire is one the best retailers out there, and I believe investors are underestimating the size of the company’s moat.

Stay smart. Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette owns shares of Canadian Tire Corporation Ltd. David Gardner owns shares of Amazon. The Motley Fool owns shares of Amazon.

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