My top stock for August was Canadian Tire Corporation Limited (TSX:CTC.A), and if you’d bought shares following my recommendation, then you were probably very happy after shares rallied 5.73% on a day when the markets tanked due to rising geopolitical fears. That’s not a bad return for just a few trading days, especially when nearly every stock saw huge declines!
Canadian Tire is an iconic brand with a fantastic management team which has shown many times that it can adapt to a harsh retail environment. Shares of Canadian Tire were an oversold, undervalued, and lost investor confidence when the management team reported that it was going to invest in e-commerce. For many investors, only one thing came to mind: Amazon.com, Inc. That likely dampened the tone for the weeks that followed the company’s Q1 2017 earnings report.
Fast forward to Q2 2017, and Canadian Tire showed investors once again that it’s still a resilient business which has the ability to think ahead and thrive, while other retailers are on their knees.
Excellent second-quarter results proved the bears wrong
Canadian Tire saw year-over-year improvements across the board. Revenue increased 1.8% year over year to $3.41 million. Gross profit, adjusted EBITDA, and net earnings all saw year-over-year increases by 3.7%, 7%, and 9%, respectively, to $1.15 billion, $433.2 million, and $217 million, respectively.
Gross margins and adjusted EBITDA margins both increased by 0.6% compared to the same quarter last year.
Retail sales also climbed slightly by 3% year over year, which was a positive, especially considering that many investors were fearful that Canadian Tire and its brick-and-mortar stores were dying in favour of digital retailers; that’s clearly not the case.
I believe the post-earnings rally was warranted and could be the start of a sustained movement to higher levels, potentially to 52-week highs. The markets are in shambles right now, so the rally may be dampened by market-wide pessimism on stocks as a whole.
Should investors buy now?
I still think shares of CTC.A are undervalued, and that many investors still don’t understand where the company is going with its recent digital-retailing initiatives. No, Canadian Tire is not ditching its brick-and-mortar stores for an e-commerce platform.
Canadian Tire and its subsidiaries are brick-and-mortar stores that are least likely to be impacted by the rise of digital retailers. Most of the big-ticket items that the company sells, you probably couldn’t fit in your door, and it wouldn’t make sense to ship them, especially since most Canadians live in close proximity to a store. The digital platform caters to those who prefer to buy smaller items and is not meant to replace any physical stores now or in the future.
Canadian Tire remains a great buy, and I’m confident that the management team will continue to deliver more impressive quarters in the coming years.
Stay smart. Stay hungry. Stay Foolish.
