In Canada, January retail sales fell by 0.3% in what is the third consecutive month of declines and below-expectation performance.
In the U.S., retail sales fell by 0.2% after a 0.7% increase in January and a roughly 2.2% increase in the last year. So, we can see that growth is slowing pretty significantly.
Volatile markets, weakening housing markets, and, most importantly, record-high debt levels are taking their toll.
With this information, we need to react and adjust our portfolios with the preservation of capital in mind.
The following two retail stocks are vulnerable in this environment due to their luxury product offerings and their respective valuations.
Canada Goose Holdings (TSX: GOOS)(NYSE: GOOS)
Canada Goose reported its third-quarter fiscal 2019 results recently, which highlighted why investors love this stock.
Revenue increased 50% and EPS increased 66%, driven by an increase in sales due to five new stores, the launch of a new e-commerce site, and increasing gross margins.
But on that day of the release, the stock fell by approximately 13%, as investors reacted to lower-than-expected margin improvements, and as it seems clear that investors’ expectations were very high.
And, in fact, the stock has fallen 28% from its 2018 highs in what is a classic case of what happens when a stock is priced for perfection.
Canada Goose stock is now trading at approximately 50 times this year’s expected earnings. That’s still high even considering the earnings-growth rates the company has historically achieved.
I don’t believe this multiple accurately reflects the risks inherent in this stock. We have seen that U.S. retail sales are slowing significantly, retail sales in Canada are weakening, and consumers continue to feel the weight of heavy debt loads, volatile markets, and weakening housing prices.
What is important is the future growth that Canada Goose will achieve and, in my view, the estimates that are out there are at risk.
Being a luxury retailer leaves it especially vulnerable to a slowdown in consumer spending, and as a retailer that lacks product diversification, this stock still makes me nervous, no matter how impressed I am with the company’s past results.
Aritzia (TSX: ATZ)
Aritzia stock is now 11% higher than its 2016 IPO price of $16, as the stock continues its volatile ride.
In the third quarter of fiscal 2019, the company achieved same-store sales growth once again, coming in at 12.9%. And net income increased 16.1%, as the retailer opened two new stores that are performing at or above expectations.
Results continue to look good, but apparel retailers are notoriously risky and vulnerable to shifts in the latest fads and competition. Trading at a 22 times P/E multiple, with headwinds such as slowing consumer spending, this retail stock is another one I wouldn’t buy right now.
Also, as in the case of Canada Goose, the macro environment makes me leery of luxury retailers such as Aritzia, so that’s another reason I would stay away from this one in particular.
