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3 Retail Stocks That Will Survive, Inc.

No company has been able to shake up the retail industry in the way that e-commerce giant, Inc. (NASDAQ:AMZN) has. The arrival of the internet and rise of online retailing giants Amazon and eBay Inc. has fundamentally changed the retail landscape, placing considerable pressure on traditional retailers.

In recent years, brick-and-mortar retail chains like Sears Canada Inc. (TSX:SCC) have fallen into terminal decline. Sears recently filed for bankruptcy after management indicated there was a very real risk of the retailer running out of the cash needed to fund its operations.

While the industry is locked in turmoil, three Canadian retail stocks are not only proving resistant to Amazon’s onslaught, but they will flourish as well.

Now what?

One standout performer is leading discount retailer Dollarama Inc. (TSX:DOL). It has grown at a rapid clip since setting up shop in 1992 and now operates 1,000 stores across Canada.

Dollarama focuses on the niche discount retailing — a market a segment that Amazon is finding difficult to break into.

For the fiscal first quarter 2018, sales grew by an impressive 10% year over year, EBITDA shot up by over 16%, and net income surged by an impressive 21%. During the quarter, Dollarama opened 13 new stores and added the ability for consumers to pay by credit card to all stores.

This rapid growth will continue for the foreseeable future.

Dollarama is also considering its options to enter the Latin American market, having established a deal with Dollar City — one of the region’s largest and fastest-growing discount retail chains. In exchange for supplying merchandise and business expertise, Dollarama has the right to buy a majority stake of that business in 2020.

The next retail stock, known aptly as Canada’s Amazon, is Shopify Inc. (TSX:SHOP)(NYSE:SHOP). It has experienced massive growth since launching its initial public offering, and its shares have surged by over 205% since mid-May 2015.

While some pundits are claiming that now is the time to take profits, there are signs that this spectacular growth will continue.

The advent of e-commerce and the threat posed to traditional main street retailers have caused many to scramble to establish an online presence. It is here that Shopify stands out. Shopify provides an e-commerce platform for small to medium enterprises that allows them to manage their web-based sales channels, social media, and physical stores through a powerful back-office facility.

Shopify has experienced stunning growth.

First-quarter 2017 gross profit almost doubled compared to the same period a year earlier. Over the course of 2016, Shopify brought a whopping 177,000 additional merchants onto its platform. That can only continue; analysts are forecasting that Canadian e-commerce sales will grow at a 10% clip over the next five years. It is estimated that only 13% of Canadian businesses are selling online, creating considerable scope for Shopify to expand its operations domestically.

A segment of the retail market that Amazon has found difficult to crack is food retailing. While Canada’s major grocery retailers are feeling pressure from e-commerce, it is not having the same impact as it is on traditional department stores.

The sale of perishable foods is particularly difficult because of the need for them to be stored, transported, and delivered in climate-controlled spaces. This increases the costs associated with perishable food sales and makes it difficult for Amazon to deliver on its promise of low margins.

Geography and convenience are also a significant challenge. The centralized nature of Amazon’s operations makes it difficult to reach consumers, whereas Empire Company Limited (TSX:EMP.A) has over 1,500 Sobeys stores operating in every province across Canada. That gives it an incredible reach while offering the convenience that consumers desire when purchasing groceries and perishable foods.

Empire Company remains focused on enhancing its retail offering to make it more appealing to consumers and ward off the threat posed by e-commerce.

The recent decline in sales for the fiscal fourth quarter can be attributed to the difficult operating environment in western Canada rather than the rise of e-commerce. Notably, net earnings for that period showed a significant improvement over 2016, highlighting that the initiatives aimed at reducing costs and growing sales are working. 

So what?

Retail is an industry undergoing a massive transformation, and while many traditional brick-and-mortar retailers are suffering, companies such as Dollarama, Shopify, and Empire Company will continue to thrive.

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Fool contributor Matt Smith has no position in any stocks mentioned. David Gardner owns shares of Amazon. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Amazon, eBay, Shopify, and SHOPIFY INC.  Shopify is a recommendation of Stock Advisor Canada.

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